POWELL TO INHERIT BOND MARKET THAT’S ON THE RISE

Trump’s choice to head Fed may enjoy relatively easier task to win traders’ trust

WHEN it comes to winning over traders in the US$14.2 trillion (RM60 trillion) Treasuries market, Jerome Powell has it relatively easy.

President Donald Trump’s choice to lead the Federal Reserve (Fed) would take the helm after a year in which the central bank’s credibility has shot up in the bond market’s eyes.

Under the guidance of Janet Yellen, policymakers have stayed true to their forecasts for gradual tightening this year, and traders are bracing for more of the same.

The third rate increase that policymakers predicted for this year looks set to take place next month and the market is starting to price in a greater chance of another hike in March.

Traders still have plenty of catching up to do: They still only see about 2.4 additional rate increases between now and the end of next year, compared with policymakers’ projection of four. The market has underestimated the resolve of Fed officials all year, only to come around as announcement dates approached.

Strategists expect that pattern will persist in coming months, unless inflation heats up.

Markets are now pricing in more than an 80 per cent chance of a quarter-point hike on December 13, showing confidence officials will hit their projection for three increases this year. And bets on the following hike coming in March are gaining traction.

The probability of that timing is about 30 per cent in the swaps market, up from 25 per cent two weeks ago, before a report that Trump was leaning towards Powell.

“The market was always far away from the Fed during the Yellen years,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “Now that we’re actually in a rate-hiking cycle and the economic numbers both domestically and globally are improving, the market may be underestimating what the Fed ends up doing next year.”

Figuring out inflation, which Yellen has called a “mystery”, will soon become Powell’s problem, assuming he wins Senate confirmation.

But as for dealing with the bond market, this year’s Fed provided the roadmap.

REUTERS PIC United States President Donald Trump (left) with Jerome Powell, his nominee to become the next chairman of the Federal Reserve, at the White House yesterday.