Market now sees June rate hike as a lock
Friday, May 7, 2004 7:03:16 PM
WASHINGTON (AFX) -- The blowout April jobs report has persuaded traders and economists that the Federal Reserve will raise rates for the first time in four years at the June meeting. Prices on federal funds futures at the Chicago Board of Trade indicate a 92 percent chance of a quarter-point rate hike in June, up from 48 percent before the jobs report was released early Friday. The fed funds market now sees the fed funds rate rising from the current 1 percent to 2.25 percent by the end of the year, an average of a quarter-point tightening in each meeting. On Tuesday, the Federal Open Market Committee said, with risks to the economy now balanced, rates can rise at a "measured" pace. The bond market also sold off on the April jobs figures. The yield on the benchmark 10-year note rose to 4.77 percent from 4.60 percent on Thursday. The yield has risen 94 basis points since the March payroll report was released. The U.S. stock markets were mixed, with the Nasdaq gaining about 0.7 percent, while the broader S&P 500 index dropped 0.3 percent. Declining shares outpaced winners by more than 5 to 1 on the New York Stock Exchange. The second straight month of strong job growth also changed some minds among Wall Street economists. "We believe a further surge in hiring during April lends even more support to our longstanding case for Fed tightening to begin this summer," said Maury Harris, chief U.S. economist for UBS. "We now believe that the Fed will pull the trigger at its June 29- 30 FOMC meeting, rather than in August, as we previously projected." The Fed will have the luxury of seeing one more payroll report and two more inflation reports before it must decide what to do. "If the report for May has a similar tone to those in March and April, the Fed will probably begin its cycle of tighter monetary policy at the next FOMC meeting," said Mike Moran, chief economist for Daiwa Securities. Some economists say the jury is still out on the Fed. "Despite the strength of this report, I still anticipate no move by the Fed until August," said Ken McCarthy, chief economist for vFinance Investments. "We are still only two months removed from a period that the Fed characterized with the phrase 'new hiring has lagged.' They will want to see some confirmation over the next couple of months and so will wait until the August FOMC meeting." This story was supplied by CBSMarketWatch. For further information see www.cbsmarketwatch.com
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