NEW YORK Interest rate futures tied to the Federal Reserve's policy rate on Friday priced in a more than even chance of tightening at either the November or December policy meetings after Chair Jerome Powell struck what market participants perceived to be a moderately hawkish tone.
The Fed though is widely expected to hold rates steady at a range of 5.25% to 5.50% at the Sept. 19-20 meeting.
Powell said on Friday Fed policymakers would "proceed carefully as we decide whether to tighten further," but also made clear that the central bank has not yet concluded that its benchmark interest rate is high enough to be sure that inflation returns to the 2% target.
He delivered the remarks at the annual economic symposium hosted by the Kansas City Fed held in Jackson Hole, Wyoming.
"It was clear from the outset that the chair was not going to offer the doves any seeds of hope," said Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee.
"The economy is running faster than the Fed expected it would, along with the labour market, but inflation is cooling and is expected to do so. The Fed's stance that higher for longer remains intact."
In choppy trading, Refinitiv's FedWatch on Friday showed a roughly 53% chance of an interest rate increase at the Oct. 31-Nov. 1 meeting. For the Dec. 12-13 meeting, the odds were about 52%.
At the CME, its own FedWatch tool showed a slightly higher probability of a hike than Refinitiv's: roughly 57% for the November meeting and 55% in December. A week ago, the rate increase chances were at 36.1% and 31.7%, respectively.
Interest rate futures tied to the Fed policy rate have shifted notably over the last few weeks.
A recent backup in Treasury yields may help buttress the Fed's efforts to weaken demand and slow the momentum of an economy that has so far mostly shaken off the most aggressive monetary tightening in more than a generation.
The Fed has jacked up its policy rate from near zero in March 2022 to the current range of 5.25% to 5.50%, but the unemployment rate remains at a historically low 3.5% and overall economic growth has defied expectations that it would falter.
Alongside the rise in bond yields, rate futures have notably repriced as well. While expectations remain firmly in place for the Fed to stand pat next month, the shift in rate futures now puts an increase at either of the final two meetings of the year squarely in play.