Powell Keeps Half-Point Hike Alive But Traders Aren’t Buying It

(Bloomberg) -- Money market traders need more convincing before pricing in the largest Federal Rate rate-hike since the turn of the century later this year, despite the latest signaling from Chair Jerome Powell.

Powell left open the possibility of 50-basis-point hike -- the first since 2000 -- at this testimony Tuesday, even as he poured cold water on the idea that it could come this month. Yet the odds of such a move by May dropped to as low as 20%, about half of what they were right after his speech.

The wavering positioning suggests investors are holding out for more clues on the inflation outlook before they price in aggressive action. While consumer prices in the U.S. are now running at the fastest pace in 40 years, there's concern that raising rates too fast could spook the market.

“A 50-basis-point hike is unlikely,” said Mark Dowding, CIO of BlueBay Asset Management. It risks being “seen as an admission of failure by the Fed and a message they are behind the curve and will need to hit the brakes hard,” he said.

The pricing also shows how far the market has come in scaling back wagers after war broke out in Ukraine. Just last month, a 50-basis-point increase by May was considered all but a done deal.

Fed-linked swaps show a quarter-point rate hike is baked in for this month with a further four increases expected by year-end. Powell said it was too soon to conclude how Russia's invasion will affect the U.S. economy and what that means for policy.

Still, not everyone is throwing in the towel. A 50-basis-point hike could come “perhaps as soon as the May meeting as they will gain more clarity at that stage,” said Piet Christiansen, chief strategist at Danske Bank.