Here's what the Fed will signal when it hikes interest rates

Though widely expected to raise rates this week, Fed policy makers are being pulled in two directions by a spirited drop in unemployment this year and a surprisingly listless reaction in wages and prices. Fed Chair Janet Yellen will hold a press conference at 2:30 p.m.

The Federal Reserve meeting is clearly the biggest event for the bond market this week, but there is a lot of important economic data due as well. The economists had previously forecast hikes in June and December. Overall, more respondents viewed those risks as roughly balanced, compared with two months ago when they anxious more that higher-than-expected growth and inflation might disrupt the Fed's outlook.In response to a separate question, economists indicated the biggest risk to the Fed's economic outlook lay in the possibility that loose monetary policy might fuel asset bubbles that threaten financial stability.

There is little doubt the Fed will raise rates, which will help numerous big banks.

Since March 14, the Barclays/Bloomberg U.S. Aggregate bond index has produced a total return of 2.89 percent, bringing its year-to-date return to 2.44 percent.

After a recent decline in the pace of price rises, just 11 per cent of respondents said inflation will record three straight months at or above the Fed's 2 per cent goal this year, compared to 42 per cent who made that prediction in March.

The Fed now holds $2.5 trillion of U.S. Treasurys and $1.8 trillion of mortgage-backed securities, a legacy of.

In oil markets, Brent crude traded at around $48.85 a barrel on Monday, up 1.47 percent, while USA crude was around $46.43 a barrel, up 1.31 percent. "The Fed needs to be more careful here with how they look at inflation".

In the $13.9 trillion TIPS market, the yield gap between 10-year TIPS and benchmark 10-year Treasuries, a gauge of investors' inflation expectations, has steadily narrowed since mid-March to 1.81 percent on Friday.

The financial market is also pricing a higher likelihood of a third rate hike for 2017 as Fed policymakers maintained a hawkish tone, despite weak data.

Investors are not upbeat about inflation outside the United States either.

However, they implied traders have not fully priced in the Fed's target range on rates reaching 1.25-1.50 percent until late 2018.

TIPS-focused funds have continued to attract money since late 2016, with their assets reaching an all-time peak of almost $63 billion in the week ended June 7, according to Lipper, a Thomson Reuters unit.

United States interest rates futures were little changed on Monday with traders seeming uncertain whether the Federal Reserve would embark on a third interest rate increase in 2017 due to recent signs of inflation softening.

"We would think it's unlikely that the Fed would throw in a surprise to the market and not move interest rates", Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, said in a phone call.

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