Three Reasons The Market Is Underpricing Fed Rate Hikes

There’s a growing consensus that the first Fed rate hike is coming in September, but it’s the shape of the tightening cycle as a whole that’s really important – will Fed chair Janet Yellen increase once and then give markets time to react or tighten aggressively with increases nearly every quarter? John Briggs, RBS head of strategy, Americas, says that clients are telling him they expect the former, but he warns that the latter is more likely.

“In both 1994 and 2004, the market underestimated the eventual degree of tightening. We believe the US rate market is in the process of repeating the exact same mistake,” writes Briggs. “Given the wide gap between market expectations and what we see as...