The capital markets are expecting a rate pause, but traders may want to pause themselves before making a rash move. Minneapolis Fed President Neel Kashkari advises against the notion that a rate pause means rate hikes are finished.
The CME FedWatch Tool is currently favoring a rate pause, but traders shouldn’t read too much into it. The Fed could continue its monetary policy tightening should inflation continue to show signs of running hot based on recent macroeconomic data.
“Right now it’s a close call either way, versus raising another time in June or skipping,” said Kashkari in an interview with CNBC. “Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done. If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information.”
So while the majority is betting on a rate pause in June, rate hikes could continue forward in July. There was already a healthy amount of optimism heading into 2023, but as the summer continues, that certainly change.
“Do we then start raising again in July? Potentially, and so that’s the most important thing to me is that we’re not taking it off the table,” he said.
“Markets seem very optimistic that rates are going to fall now. I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right,” he added. “But nobody should be confused about our commitment to getting inflation back down to 2%.”
Trade Treasuries as Fed Mulls Rates
The bond markets took a proverbial beating last year, but bullishness on less rate hikes in 2023 have been helping the bond market. If bullishness continues to prevail, consider the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD).
TYD seeks 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. The index is a market value-weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to 10 years.
If the uptrend reverses, there’s always the other side of the trade — an advantage of inverse ETFs. That said, also consider the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO) as a tactical tool for trade reversals.
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