Whereas the Federal Reserve is extensively anticipated to carry rates of interest regular on Wednesday, discussions round potential hikes have gained traction.
Analysts at Barclays reaffirmed their expectation for barely decrease charges by means of 2025 however cautioned that fee hikes aren’t completely off the desk. Choices markets have begun pricing in a roughly 25% chance of a rise.
“The bar for the Fed to reverse its rate-cutting cycle stays excessive,” Barclays macro researchers wrote in a shopper observe Tuesday. “A coverage reversal may undermine the Fed’s credibility, making it a troublesome resolution.”
Nonetheless, the staff famous that if financial information begins signaling a resurgence in inflation, rising inflation expectations, or a pointy decline in unemployment, fee hikes may turn out to be an actual chance.
Historic Precedents
Barclays analysts examined three previous situations the place the Fed shifted again to tightening:
March 1997 and June 1999: Price hikes adopted tightening labor markets and powerful financial development.
Late 2021 to Early 2022: The Fed tapered balance-sheet growth, a transfer seen as a precursor to fee hikes, earlier than explicitly signaling will increase.
In all three circumstances, labor market power and a steepening yield curve had been key components.
Market Reactions
The benchmark 10-year Treasury yield (4.52%) has already risen above the 3-month Treasury yield (4.29%), reflecting financial resilience and coverage considerations tied to a possible second Trump administration.
Brief-term yields initially fell because the Fed started fee cuts in September and December, bringing the coverage fee to 4.25%–4.50%, a full share level beneath its cycle peak.
Ought to fee hikes materialize, Barclays expects the 2-year and 10-year Treasury yields to exceed 5%, which may strain equities. The financial institution’s fairness strategists beforehand warned {that a} 10-year yield above 5% may pose dangers for inventory markets.
Watching the Treasury Market
A possible fee hike may additionally set off a repricing within the Treasury invoice market, driving up short-term charges. This, in flip, may additional increase the $7 trillion money-market fund business whereas pressuring financial institution deposits.
Fed’s Subsequent Strikes
Regardless of renewed fee hike discussions, expectations nonetheless lean towards additional fee cuts in 2025. As of Tuesday, Fed-funds futures merchants priced in a 50-basis-point lower this yr, up from 25 foundation factors the prior week, per the CME FedWatch Device.
All eyes at the moment are on Fed Chair Jerome Powell’s remarks throughout Wednesday’s press convention and Friday’s launch of the Fed’s most well-liked inflation gauge—the December private consumption expenditures (PCE) index.