It’s simple math. The Fed has six scheduled meetings remaining in 2022 and yet the median forecast is eight 25bps moves in rates before year end according to the CME’s FedWatch Tool.
That suggests two meetings where the Fed makes more than a 25bps move up in rates. That might happen as soon as next month, the Chair of the New York Fed just called a 50bps move in May “a very reasonable option”, and the President of the Cleveland Fed wants to “be more aggressive earlier rather than later”.
Double Or Triple?
The markets currently expect a 50bps move in May, double the move we saw in March where the Fed raised rates for the first time in three years. There’s in fact a reasonable chance of a triple-sized move in June on current market estimates, though another double move seems more likely in the market’s view. Plus of course, a double move in March was a possibility that never materialized.
With inflation running hotter and less transitory than expected at 8,5%, the Fed wants to act sooner rather than later, especially as the U.S. job market remains robust. Underlying inflation may be more subdued that headline rates suggest, but still well ahead of the Fed’s 2% target.
The Yield Curve
This move up in short-term rates is likely to push the U.S. yield curve further towards inversion, something we saw temporarily a few weeks ago. Inversion can signal a U.S. recession is on the horizon. However, in recent weeks increasingly longer rates have given the yield curve more of an upward slope. That may give the Fed more confidence in their plans to raise rates. They want to cool prices but maintain a healthy job market. Not an easy balancing act if history is any guide.
This may yet another sign of normality resuming after the pandemic. In January 2020, just before the pandemic hit, Fed funds were in a 1.50%-1.75% range. With two double moves in May and June and a further hike in July, the Fed will have reversed the drop to zero rates from March 2020. However, the Fed still expects to raise rates further than that in an effort to contain prices.
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