Expectations are growing that the Federal Reserve will hold its benchmark interest rate steady this month rather than raise it, after June nonfarm payrolls came in far weaker than expected. As the odds of a near-term rate increase declined, U.S. Treasury prices rose and the dollar weakened.
According to the CME FedWatch Tool on Wednesday, the federal funds futures market raised the probability that the Fed will hold rates at its July Federal Open Market Committee (FOMC) meeting to 82.4 percent, up from 71.1 percent the previous day. The probability of a 0.25 percentage point hike fell to 17.6 percent from 28.9 percent. The odds that the Fed will keep rates unchanged through the end of this year and the odds of a 0.25 percentage point cut also rose to 42.2 percent and 23.5 percent, respectively, from 39.0 percent and 16.7 percent. The overall probability of a rate hike retreated to 34.2 percent from 44.1 percent.
The rise in the probability of a rate freeze and the retreat in hike expectations stemmed from the June nonfarm payrolls report released by the U.S. Labor Department that day. June nonfarm payrolls rose by only 57,000 from May, about half the Wall Street forecast that had projected an increase of 110,000. In addition, April nonfarm payrolls were revised down to 148,000 from 179,000, and May figures were revised down to 129,000 from 172,000. As warning signs emerged in the U.S. labor market, which had been considered solid, expectations spread that the Fed would choose to hold rates rather than raise them immediately, at least at this month's FOMC meeting. The next FOMC meeting will be held from the 28th to the 29th.
Earlier, the Fed held its rate at the existing 3.50-3.75 percent at the FOMC meeting on the 17th of last month, the first chaired by Chairman Kevin Warsh. At the same time, in its dot plot—a chart released quarterly that shows Fed members' rate projections as dots—it changed its year-end rate path from "one cut" to "one hike" for the first time in three months. At a policy forum hosted by the European Central Bank (ECB) in Sintra, Portugal, on Tuesday, Warsh also assessed that "the potential growth rate is on an upward trend and the labor market is relatively flat."
As expectations of a Fed rate hike faded, financial markets also fluctuated. The yield on the two-year U.S. Treasury note, which is sensitive to monetary policy, fell 0.027 percentage point from the previous trading day to 4.137 percent. A decline in Treasury yields means prices have risen by that much. As expectations for interest income on the dollar diminished, the dollar index (DXY), which reflects the dollar's value against six major currencies, fell to 100.86 from 101.39 the previous day.
Spot gold, whose holding value falls as rates rise, gained more than 2 percent during the session to surpass $4,117 per troy ounce. Silver also jumped nearly 4 percent intraday to break through $61 per troy ounce. As rate-hike pressure eased, Bitcoin, a representative risky asset, also rose about 6 percent during the session to reach $61,888.
