Traders are betting on Hawkish Policy Gaffe on both sides of the Atlantic

Traders are betting on Hawkish Policy Gaffe on both sides of the Atlantic

A cohort of brokers is betting the hawkish monetary lurch on both sides of the Atlantic will prove a policy mistake down the road- – constraining central banks to slice rates to rescue economic development. As a large number of Wall Street names including previous Salomon Brothers chief economist Henry Kaufman and bond-market veteran Dan Fuss lash experts for allowing inflation run wild, one corner of the interest-rate market presently proposes the Federal Reserve will be compelled to reverse course in three years’ time.

“In hiking policy rates, central banks are trying to fix an inflation problem they did not cause, and in doing so may cause more harm than good,” wrote Jamie Searle, rates strategist at Citigroup Inc. “Policy-error pricing is creeping in for the Fed, as is already the case for the BOE.”

It’s a trend that started in the U.K. even before the Bank of England surprised the market by raising interest rates to 0.25% last month — its first increase in three years.

Fed officials are signaling higher borrowing costs to come in the grip of the highest inflation in nearly four decades in large part thanks to the chaos in global supply chains.

Money markets are wagering on six 25-basis-point hikes in the next two years — before the policy rate plateaus and dips slightly in 2025. In the U.K., investors are betting the Bank Rate will climb to as high as 1.35% in 18 months’ time before easing.

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