The Federal Reserve is expected to raise interest rates today to a 0.50%-to-0.75% range, according to the consensus forecast of analysts via Econoday.com. There’s always room for a surprise, of course, but the telltale signs look compelling for projecting that the central bank will lift its policy rate in today’s monetary announcement at 2:00 pm eastern. Here’s a quick recap of how some of the evidence stacks up according to several market-based indicators.
In anticipation that the Federal Reserve will announce a hike in interest rates today, the policy sensitive 2-year Treasury yield ticked up to 1.17% on Tuesday (Dec 13)–the highest in more than six years, based on daily data from Treasury.gov. Meanwhile, the benchmark 10-year yield ease to 2.48%, a hair below Monday’s rate, which marked the highest level since June 2015.
Fed Funds Futures
This market has priced in a 91% probability of a rate hike today, based on CME data at the end of the day on Tuesday.
Treasury Yield Curve
The short end of the curve for maturities up to 2 years is at or near the highest rates since the end of the Great Recession (June 2009). Note too that rates for all maturities have jumped sharply as of yesterday (red line) vs. 30-trading-day-earlier yields (blue line).
Treasury Yield Spreads
The spread on long less short rates has increased sharply in recent weeks, a sign that the market is expecting stronger economic growth and higher inflation. In turn, this market-based indicator offers another clue for expecting that the Fed will raise interest rates today. For example, the spread for the 10-year/2-year yields is currently 1.31% (red line in chart below), close to the highest level in more than a year.
Treasury Market Inflation Forecast
Market-based projections for inflation have been steadily rising in the second half of 2016, providing the Fed with another excuse to raise interest rates in an effort to manage expectations on pricing pressure. The implied inflation forecast via 5-year maturities is currently 1.86%, the highest in more than two years.
Treasury Yield Moving Averages
Momentum for Treasury yields has turned sharply higher in recent weeks, suggesting that rates will continue to increase in the near-term future, based on a set of exponential moving averages (EMAs). The 50-day EMA for the 2-year yield, for instance, has climbed well above its 100-day EMA, which has moved decisively above the 200-day EMA.