Traders are certain that the Fed is going to hike rates this week

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March 8, 2017 3:12 PM

Fed fund futures — which show bets that traders are placing on interest rates — reflected a 100% probability of a rate hike next week.

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Futures traders are fully convinced that the Federal Reserve will raise interest rates at its March 14-15 meeting.

Last week Wednesday, Bloomberg's World Interest Rate Probability reflected a 100% probability of a hike in March for the first time. On Tuesday, CME Group's FedWatch tool, which reflects the probability of rate moves, showed a 93% chance.

The Federal Open Market Committee is expected to increase its benchmark fed funds rate by 25 basis points to a range of 0.75%-1%.

"The FOMC meeting already happened," said Neil Dutta, the head of economics at Renaissance Macro, in a note to clients on Monday.

Expectations began to rise as several Fed officials, including Chair Janet Yellen, spoke in support of raising interest rates sooner rather than later.

Traders hiked their bets after a report from the ADP Research Institute last week showed that the US economy added 298,000 private payrolls in February, the highest monthly gain since January 2006. The government's jobs report confirmed this strength on Friday, showing a gain of 235,000 nonfarm payrolls and a drop in the unemployment rate to 4.7%.

The Fed is expected to raise rates again even though its preferred measure of inflation — personal consumption expenditures — trails its 2% target.

And so unlike typical hiking cycles, the Fed's readiness to raise rates now is not an effort to cool down the economy, but to bring rates closer to a level considered normal.

"What the Fed has to worry about is that if they hike in March, they also have to communicate to the market that this is not just a hike-every-quarter type of thing, kind of a hike cycle like we saw during the Greenspan era," Greg Peters, a senior investment officer with PGIM Fixed Income, told Business Insider.

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