Traders Now Expect Fed Policy Rate to Peak in September Not July

The market for wagers on the course of Federal Reserve policy shows that traders now expect the US central bank’s policy rate will peak in September, where they previously looked for it to crest in July.

The Fed’s target range for the federal funds rate — which it is expected to leave unchanged at 5%-5.25% at the meeting that concludes at 2 p.m. in Washington — has resulted in an actual rate of 5.08%. The highest rate on swap contracts for future meetings was about 5.28% in September on Wednesday morning, with the July contract’s rate at 5.26%, both less-than-fully pricing in a 25-basis-point increase. As recently as Tuesday the July contract’s rate was higher, anticipating no rate increases after that point.

Upcoming Fed meetings are scheduled for July 26 and Sept. 20.

The minority view that the Fed might raise rates in June got beaten up Tuesday by May inflation data that showed more deceleration than expected. However, the view that rate cuts are possible during the second half of the year was also damaged, as inflation remains well above the Fed’s 2% target. The December contract’s rate at 5.15% continues to price in about half of a rate cut from the expected peak.

The prospect of a hawkish policy outlook from Fed officials via their latest Summary of Economic Projections — to be released Wednesday with the rate decision — has driven short-term Treasury note yields to their highest levels since March.