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In an unusual stance toward the current market outlook, traders on Wall Street are placing a bet that the United States Federal Reserve will hike interest rates beyond 6% this year. According to Bloomberg, current trading activities as shown on the Chicago Mercantile Exchange are already growing based on preliminary open interest.
According to the insights shared, a trader as of Tuesday has already placed a bet worth around $18 million that the Feds will hike the interest rate to 6% by September when the current options expire. Should the projection come to pass, the trader will cart away with as much as $135 million in what will be one of the most unusual bets in the past decade.
Similar bets have also been placed with respect to this, a scenario that implies the conviction the Feds are not done with their rate hikes is growing. The 6% interest rate projection will come off as a 0.9 percentage point from the 5.1% that has already been priced in the month of September.
The trade placed as described will attain a break-even point when the interest rate is pegged at around 5.6%. Should the rate climb higher to 5.8%, the wager would have made a massive return of $60 million.
The current leaning of Wall Street traders is at best confusing as bets as of last week had a different direction. At the time, traders were optimistic that interest rates will crest sometime this year and that the Federal Reserve will do all it needs to reduce the borrowing rates by a few percentage points by the end of the year.
Risky bets like this show how much uncertain the global economy is and the disposition of the United States Federal Reserve to it.
Wall Street Trader’s Convictions
For the traders on Wall Street to start changing their course with respect to the direction of the Fed’s monetary policies, it is obvious that they are taking Chairman Jerome Powell’s words at face value.
With a cumulative of 8 interest rate hikes since the beginning of last year, the Feds slowed down its aggressive stance and announced a 25 basis points hike earlier this month. The dovish stance was applauded as industry veterans believe the cost of borrowing will be reduced to aid economic growth.
However, the latest job data released showed the US economy is a vibrant one, a move that has made Powell re-introduce the likelihood of future interest rate hikes.
“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” the central bank chief said during an event in Washington, D.C. “But it has a long way to go. These are the very early stages.”
With the next key monetary policy meeting slated for March, analysts’ gazes are fixed on the announcements from the Fed.