The Federal Reserve is widely expected to announce that it is raising interest rates by only a quarter of a percentage point later Wednesday: Traders were pricing in a 98.4% probability of a so-called 25 basis point interest rate hike earlier this morning, according to fed funds futures tracked by the Chicago Mercantile Exchange.
So what about that remaining 1.6%, you ask?
Amazingly enough, the market was briefly pricing in a small likelihood that the Fed will do NOTHING today and leave rates unchanged at a range of 4.25% to 4.5%. Cue Jim Carrey’s “Dumb and Dumber” Lloyd Christmas character: “So you’re telling me there’s a chance?”
The hopes of a rate-hike pause were seemingly dashed as the morning wore on, though. After the market opened, the pendulum swung away from no rate change and back to a half-point hike, with traders factoring in a slightly more than 2% likelihood of a 50-basis-point increase.
That makes sense. Inflation pressures have cooled somewhat in the past few weeks but prices are still rising at a higher than historical rate. That’s why some inflation hawks still think the Fed should be aggressive.
“Even when you start feeling better after the first few days of an antibiotic, you’re always supposed to take the full dose,” said University of Central Florida economist Sean Snaith in an email.
“If the Fed doesn’t quash this inflation during this current course of treatment, and it flares back up, it’s going to be harder and more painful to put out,” he added.