Fed Leaves Rates Unchanged (Large Wager Placed On Faster-than-expected Pace of Rate Hikes)

Much to no one’s surprise, The Fed has left interest rates at near historic lows.

(Bloomberg) — One large option bet built up over the past week is aiming for a surprise at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole.

While much of the focus this week is on the imminent Federal Open Market Committee decision and Fed Chairman Jerome Powell’s press conference Wednesday, some are looking ahead to the August event in Wyoming, which has often been used by central bankers to signal changes in monetary policy. Last year, Powell unveiled a new policy framework for inflation, while in 2012 Ben Bernanke signaled more bond purchases were on the table.

Ahead of this year’s meeting, a large wager has been placed on a faster-than-expected pace of rate hikes before Sept. 2024, though with an expiry of this coming September.

As it stands, Eurodollar futures imply around five rate hikes, or 125 basis points of tightening by Sept. 2024. The new bet has been entered via risk reversals — where investors buy options which pay off if rates rise but offset the cost by selling those which benefit from a fall — and tops 100,000 contracts, according to traders based in the U.S. who declined to be identified as they aren’t authorized to speak publicly. New positioning was added in the structure over Tuesday’s session, preliminary open interest data from the Chicago Mercantile Exchange show.

It is always a puzzle how The Fed thinks that Q1 GDP growth of almost 8% with an unemployment rate of 6% needs more stimulus.

And the Dow Jones Industrial Average went haywire after the (expected) announcement … then returned to lower than where it was prior to the announcement.

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