Eurodollar, Fed funds futures pare back U.S. tightening bets

The eurodollar and Fed funds markets, which track short-term interest rate expectations, on Wednesday reduced bets on the time frame of a potential tightening by the U.S. Federal Reserve after it dampened expectations of an early move.

Trading has been choppy after the Fed statement and Fed Chairman Jerome Powell’s news briefing, with futures pricing changing frequently, therefore shifting rate hike bets as well.

In the more liquid eurodollar futures market, traders have priced in a 90% chance of a Fed hike by March 2023 after the Fed statement, pushing back from December 2022.

Traders still factored two additional rate increase in 2023, but the implied yields have come down a bit, suggesting a less firm conviction, compared with that before the Fed meeting.

The fed funds market, which has thinner volume, showed a roughly 80% chance of a rate hike by February 2023, compared with expectations for tightening by December 2022 before the Fed comments.

In a statement after the Fed held interest rates steady, the U.S. central bank said it expects a rapid jump in economic growth and inflation this year as the COVID-19 crisis winds down, and vowed to keep its target interest rate near zero for years to come.

Powell also said it was too soon to discuss tapering asset purchases, stressing its commitment to wait for “substantial further progress” toward the Fed’s goals.

“Overall, the message struck by the Fed today was dovish and saw the central bank push back against market pricing,” said Simon Harvey, senior FX market analyst at Monex Europe in London.

“With very little to quantify the parameters of the new inflation framework, markets are going to take whatever information they can get, even if the forward-looking measures aren’t representative of the Fed’s behind-the-curve reaction function.”