With central bankers printing cash at a rapid pace and governments handing out free money, you’d think inflation, and higher interest rates, were right around the corner. Money market traders don’t think so. Judging by where they’re putting their bets, they don’t see rates ramping up in the U.S. until the second half of 2023.
Kenneth Broux, a strategist at Societe Generale in London, said:
“Markets are now definitely pricing in rate hikes by the second half of 2023, but the time frame is a long way away and it will keep shifting, especially if the U.S. continues to lose jobs as they did in December.”
Traders are still looking at the same factors as everyone else, such as deficit spending, fiscal stimulus, and recovering economies around the world. The difference is their judgment on when those things will transform into inflation. Traders think it will take a couple more years before central banks are forced to raise rates to fight higher prices.
Eurodollar futures maturing in September 2023 show traders think rates will be up to 0.40% higher. That might not sound like much, but any move to higher rates comes with nasty consequences, such as higher costs for governments to service existing debt. If rates walk up, governments around the globe will have to put more of their budgets toward net interest costs.