Yahoo Finance's Julie Hyman discusses market pricing and expectations over Fed policy rate, the differences between where the market, Bank of America, and economists think Fed rates will be, and how the debt ceiling crisis may impact rates.
DIANE: After a streak of Fed rate hikes, analysts are expecting a pause at the June meeting. Markets are currently pricing about 50 basis points of rate cuts before the end of 2023. However, a recent Bank of America report suggests there's a wedge between market pricing and expectations. Here with the details on that is Yahoo Finance's Julie Hyman.
JULIE HYMAN: Hello, Diane. So I'm looking right now at the CME Fed watch tool which is one of my favorites to see what markets are pricing in for the June meeting. Right now, there's a 64% chance that there will be no change and about a 35, 36% chance that there will be an increase at that meeting. If you take until the end of the year, as you mentioned, people are pricing in a cut before the end of the year. And this is something that's been hotly debated recently that are indeed we're going to see a cut, might we see a cut next year?
The Bank of America note basically says markets tend to be wrong, wrong on both sides, that they tend to overestimate how many either hikes or cuts there are going-- basically, they have trouble gaming it out. And so if you look at their research here, there you're seeing where the market is pricing it, where bank of America thinks the path will be and also the consensus of economists surveyed by Bloomberg. So the market right now has rates lower than where bank of America thinks they will be, and then where economists think they will be.
And so we keep having this sort of ongoing debate about whether quote unquote, "the stock market is right--"
JULIE HYMAN: "--or the bond market is right in terms of what they are pricing at these levels."
DIANE: It's true. And I mean, you had talk out from the Fed officials this week. You had Dallas Fed President Lorie Logan speaking out this week and saying, yes, the data shows progress, but it's too soon to tell, right about what's going to happen you know, and now we have this language of, is it going to be a skip but this meeting in June with regard to what the Fed will do next?
JULIE HYMAN: Yes. And we are going to hear from Fed Chair Jay Powell and former Fed Chair Ben Bernanke. They're due to speak this hour in a conversation. We don't know that we're going to get anything on the direction of rates, but we did speak with economist Joe Brusuelas Willis of RSM in the last hour, and he talked about his expectations for where the Fed might end in this particular cycle. And what we might hear from them next.
JULIE HYMAN: My sense is they're going to upgrade the forecast for this year. So we'll look like an inflation is imminent, then we can have a much more nuanced discussion around the evolution of the path of monetary policy, and indeed the Fed may need to pull back on its quantitative tightening program. Because after we get through the debt ceiling, they're going to-- Treasury is going to have to flood the market with money, and you're going to want to watch the repo market as the canary in the coal mine around some near-term disruptions once we get through the artificial political crisis that's been induced.
JULIE HYMAN: Yeah. To Joe's point, there is that little fly in the ointment called the debt ceiling crisis. And that also could affect how all of this is gamed out.
DIANE: Yeah. Well we'll certainly be watching for what Chairman Jay Powell has to say today along with former Fed Chair Ben Bernanke.