The Federal Reserve remains on track for another round of tightening monetary policy at next week’s FOMC meeting, based on a several indicators. If the central bank announces another rate hike, it’ll mark the eighth increase since the Fed began squeezing policy post-recession in December 2015.
Market sentiment is clearly anticipating the Fed will roll out another rate hike at its policy announcement on September 26. Fed funds futures this morning are pricing in a 94% probability that the target rate will rise 25 basis points to a range of 2.0% to 2.25%, based on CME data.
The central bank has certainly laid the monetary groundwork for hikes by extending and deepening the contraction in inflation-adjusted base money (aka M0), also known as high-powered money that’s controlled by the Fed. The one-year trend in real M0 fell for a sixth straight month in August, sliding 10.7% vs. the year-earlier level – the biggest decline in nearly two years.
The policy sensitive 2-year Treasury yield is also pointing to an increasing likelihood that another rate hike is near. This widely followed maturity, which is considered an indicator of expectations for near-term monetary policy bias, held steady for a second trading day at 2.78% on Monday (September 17), a post-recession high, based on daily data via Treasury.gov.
Fed officials have been recently talking up the case for more policy tightening. Eric Rosengren, the president of the Federal Reserve Bank of Boston, for example, recently advised that higher rates are necessary to avoid threatening US financial stability with excessively low borrowing costs, which can trigger unwarranted risk-taking. Speaking to the Financial Times, he said “we do need to be concerned about financial excesses,” explaining that the historical record for unmanaged “boom-bust cycles” isn’t encouraging. As such, he recommended that the Fed “lean against the wind a little” via rate hikes.
