Markets bet on Fed rate hike as soon as July

Federal Reserve Chairman Jerome Powell walks off after a news conference following the Federal Open Market Committee meeting, Wednesday at the Federal Reserve Board Building in Washington. (AP Photo/Jacquelyn Martin)

Market pricing for ‌a U.S. Federal Reserve interest-rate hike by September is ‌about 75 per cent, with better-than-even odds of a Fed ‌rate hike as early as July.

Five days ago, the market had no hint of a rate-hike expectation at all this year, let alone for July, and indeed showed traders firmly believed the Fed’s next move ​would be ​to reduce borrowing costs. That is ‌a huge swing. ⁠As recently as last month, financial markets reflected an expectation for two interest-rate cuts by the end of the year.

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For the first couple of weeks of the Iran conflict that began ⁠on Feb. 28, markets continued to think the Fed would ease policy, looking through the effect of higher oil prices.

Fed policymakers largely ⁠echoed that view. The reversal began this week as the Iran conflict escalated and Fed Chair Jerome Powell indicated he did not believe the risks to ​the job market outweighed risks to inflation. ‌

On Thursday and Friday, the ⁠shift gathered steam, ⁠particularly after Fed Governor Christopher Waller, an influential dovish voice at the central bank, said the ⁠risk of persistent inflation arising from the war with Iran was strong enough to convince him ‌to cast his vote for keeping interest rates on hold ⁠this week, instead of cutting ‌them as he had previously thought he would.

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Stocks have dropped and the yield on the two-year Treasury note - ‌which closely tracks the ‌direction of Fed policy - jumped.

(Reporting ​by Ann Saphir Editing by Rod Nickel)