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Investors are placing a near 100 per cent chance of a Federal Reserve interest rate hike later this month – the first tightening of monetary policy under the presidency of Donald Trump.

Following a spate of comments from Fed rate-setters eyeing a March hike in the last week, markets are placing a 97 per cent implied probability of a 0.25 percentage point rise to the Fed funds rate when policymakers meet on March 16. Expectations have climbed dramatically from just 50 per cent last week.

A March rise would be only the third since the financial crisis and lift US interest rates to 0.75 – 1 per cent. Markets are also increasingly betting on three, rather than two, rate rises this year – in line with the Fed’s own forecasts for the year.

The Fed last raised rates in December a month after Mr Trump’s election. The Republican candidate was inaugurated in January and is promising to unleash a wave of tax cuts and spending in the world’s largest economy leading economists to hike their growth and inflation forecasts for 2017.

“The markets are locked, loaded and ready – a move is priced in, near-unanimously expected by forecasts, who on balance now also agree with the Fed’s projection of three moves this year”, said Kit Juckes at Société Générale.

Mr Juckes also notes that short positions on US 10-year Treasury bonds – which reflect bearish bets on bond prices – have now reached a record level according to data from the Commodity Futures Trading Commission (see chart below).

Bond prices are likely to fall on higher US interest rates and rising inflation, pushing up yields. Benchmark US 10-year yields are at 2.48 per cent, slipping one basis point on Monday.

“The growth rate of the core PCE inflation is only a tenth below policymakers’ year end 2017 forecast”, noted Joseph LaVorgna at Deutsche Bank.

With fresh jobs numbers from the US due on Friday, analysts think that barring a major shock, nothing will cause the Fed to change course. “A March hike from the Fed looks a near certainty unless we see a material increase in the unemployment rate or evidence of large numbers of people reentering the labour force,” wrote Goldman Sachs.

Chart via Bloomberg

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