Underneath the bond market’s relatively muted response to the Federal Reserve’s revised rate outlook on Wednesday is an expectation from traders that the central bank won’t get as far as it thinks it can on raising benchmark policy rates.
Ordinarily, Treasury spreads would be widening, not shrinking, in anticipation of higher policy rates from the Fed as brighter U.S. economic prospects get priced in. Instead, some strategists described the Fed’s message on Wednesday as dovish, considering fewer-than-expected policy makers called for a first rate hike next year from the current 0% to 0.25% range, and there was no formal tapering announcement.
Fed officials never managed to get the benchmark fed-funds rate target above 3%, even during the longest U.S. economic expansion on record, which was cut short last year by the pandemic.
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