(Bloomberg) -- Market pricing shows traders are bringing forward forecasts for when the Federal Reserve will raise interest rates amid growing reflation optimism. At the same time, there are limits to how fast the central bank can act.
The Fed wants to end asset purchases before commencing rate hikes, which provides a “soft bound -- around late 2022 -- as the earliest plausible liftoff time,” according to Goldman Sachs Group Inc. strategists including Praveen Korapaty in New York.
Interest-rate swap markets are pricing the first 25 basis point of Fed hikes around mid-2023, versus early 2024 earlier in February. While there’s now 50 basis points of increases expected for 2024, any more may be hard to sustain, the strategists wrote in a note.
Growing optimism over U.S. stimulus spending, vaccine roll-outs and a global economic recovery has driven up market-based measures of inflation and spurred a selloff in bonds around the world. Benchmark 10-year Treasury yields have jumped almost 20 basis points in just over a week.
Read more: Fed’s Williams Says Rising Treasury Yields Reflect More Optimism
The Fed’s shift to look at average inflation means the pace of hikes should stay relatively gradual, the Goldman Sachs strategists said. A more optimistic outlook may see increases priced in sooner, which should stop any additional hike premiums being injected into the 2023/2024 portion of the forward curve, they said.
The strategists recommended adding weighted June 2023 versus June 2024 flatteners in Eurodollar futures, as this would benefit from rate moves in either direction.
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