NEW YORK: A market indicator watched by Fed as one of most accurate gauges of economic health is pricing in lower rates for first time in more than a decade.The little-known near-term forward spread, which reflects difference between forward rate implied by Treasury bills six quarters from now and current three-month yield, fell to -0.0653 basis point on Wednesday.It was first time since March 2008 gauge -- seen as a proxy for traders outlook on Federal Reserve policy -- fell below zero.Crossing threshold indicates market sees easier policy and recession in next several quarters, economists at US central bank wrote in a research paper dated July 2018.When negative, it indicates market participants expect monetary policy to ease, presumably because they expect monetary policymakers to respond to threat or onset of a recession, Eric C.
Engstrom and Steven A.
Sharpe wrote.
When market participants expected and priced in a monetary policy easing over next 18 months, their fears were validated more often than not.Money markets have been paring back expectations of rate hikes as economic data weaken and equities whipsaw.
Last week, traders priced in no move in Federal Funds rate this year and more than a 50% chance of a rate cut in 2020.In their paper, Fed economists said gauge had more predictive power than other long-term spreads, such as differential between two- and 10-year Treasury bonds.Still, some investors including Manoj Hemrajani, manager of Macroscope hedge fund, prefer to take their cues from latter.
Hemrajani said he anticipates it will turn negative in 2019.