Is the Fed Really About to Raise Rates Instead of Cutting Them?

 

Here’s a surprise for you: the market’s suddenly betting on the Fed raising interest rates instead of cutting them. After a shockingly strong US non-farm payrolls report on January 10, some bond traders have started making this "reverse bet," which is a pretty wild shift from the consensus that the Fed would cut rates this year.

 

As of last Friday, traders are pricing in about a 25% chance of a rate hike before the end of the year. That’s a significant jump from just a week ago when the chances of a rate hike were virtually nonexistent. Before the December CPI report, the market was all in on the Fed cutting rates, but now, with this unexpected change in employment data, traders are reconsidering everything.

 

 

Even though the December CPI data gave a little fuel to the “rate cut” camp by pushing US bond yields lower, this reverse bet is still holding steady. The probability of a rate hike, which was around 30% before the CPI data, now sits at 25%.

 

So, what’s behind this shift? Well, it seems to be a bet on what Trump might do when he takes office. Specifically, traders are expecting his proposed tariffs and policies could ignite inflation, forcing the Fed into an awkward position where they might have to raise rates to cool things down.

 

Phil Suttle, a former economist at the New York Fed, is one of the main voices backing this theory. He believes Trump’s policies could spur inflation, and he’s predicting a rate hike as early as September. The real kicker here is that if inflation comes in stronger than expected in the next few months, bond traders might be forced to rethink their positions, and the possibility of a rate hike could quickly move from "unlikely" to "on the table."

 

Powell’s December remarks, though, weren’t as definitive. While he made it clear the Fed doesn’t want inflation to rise above the 2% target, he didn’t rule out rate hikes either. This all feels a bit reminiscent of 1998, when the Fed quickly slashed rates in response to the Russian debt crisis, only to raise them again in 1999 as inflation pressures emerged.

 

For now, the broader market is still betting on rate cuts—around 50% of traders expect another 25bps cut—but with inflation potentially picking up, this scenario could flip in a hurry. If inflation surprises to the upside, this “surprise rate hike” could become a lot more likely.

 

Personally, I think this is definitely one to keep an eye on. The Fed’s caution has been the name of the game for a while, but with the unpredictability of inflation and political developments, it wouldn’t be too surprising if they end up making an unexpected move.

 

What do you think? Is the Fed really about to raise rates this year, or is this just a passing trend? #fedrate