Investors are reducing their expectations for a quicker start to the Federal Reserve’s rate-hike process, as the continued spread of the delta variant of the coronavirus that causes COVID-19 stokes concerns about a broad-based U.S. and global economic slowdown.
Those reduced expectations were reflected in data compiled by the CME Group Inc., where the odds of the Fed remaining on hold through at least November of 2022 went up on Tuesday. The data shows a 64% chance that the target for the fed funds rate will still be around 0 to 0.25% by then, versus a probability of less than 60% on Monday. The shift in expectations is also being reflected in Treasury yields, where rates on maturities of five years
and under have fallen while longer-end rates climb. That’s also pointing to the possibility of a later start to the Federal Reserve’s tightening process, along with a somewhat brighter long-term economic outlook, than investors had expected as of Monday. Yields and debt prices move in opposite directions.Fed officials have penciled in the first rate hike, known as liftoff, to occur in 2023. But the fast pace of the U.S. economic reopening, coupled with high inflation reads in recent months, had led investors to envision an earlier-than-expected move. The continued spread of the delta variant, along with recent developments in markets, should support those on the Federal Open Market Committee, like Fed Chairman Jerome Powell, “who are practicing patience,” according to a note from Washington-based Monetary Policy Analytics, led by former Fed Gov. Larry Meyer. The note was titled, “Disappointment Likely for Those Itching to Taper.” Long-dated Treasury yields recovered after tumbling on Monday, when the the 10-year rate
touched its lowest level since February as investors sought safety in government paper. Stocks were bouncing back Tuesday, with the Dow Jones Industrial Average
rising 619 points, or 1.8%, after dropping more than 700 points in the previous session. The S&P 500