Futures Market Says Trump Is Right about the Fed and Interest Rates

Often divisive Trump switches to Consoler in Chief role

Donald Trump’s criticism of the Federal Reserve’s plans to hike interest rates is now getting support from financial markets.

Interest rates futures now suggest that the Fed will only hike interest rates once in 2019. Just a few months ago, futures were indicating two hikes in 2019. The Federal Reserve’s own projections from September revealed that its policymakers were expecting three hikes next year.

Contracts tied to the Fed’s policy rate that are traded at CME Group’s Chicago Board of Trade have fallen in recent weeks. They now say there is just a 72 percent probability of a hike in December, down from readings close to 90 percent.

The Fed’s target interest rate for overnight loans between banks is now a range of 2.0 percent to 2.25 percent. If the Fed hikes as expected in December, that will rise to a range of 2.25 percent to 2.5 percent.

It is in the implied forecast for next year that the biggest change has occurred. A few months ago, the market had a better than even chance that rates would go up at the Fed’s meeting in March. Now the futures point toward the Fed holding steady in March, with just a 36 percent seeing the target move above 2.5 percent.

The first time a hike in 2019 is favored by the futures odds is now June, when the target is expected to rise to a range of 2.5 percent to 2.75 percent.

And after that, there are no more hikes with greater than even probability in 2019. Futures imply that there is only a 32 percent chance that the Fed’s target will be above 2.75 percent to 3.0 percent by December of 2019.

Trump has said on a number of occasions that the Fed was being too aggressive with interest rates, putting the economy’s rate of growth in danger. Now it seems that the market believes Trump is right and that the Fed will have to scale back its plans to hike rates.

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