Fed Tees Up March Hike, But What’s Next?

The Fed’s decision to hold rates steady in January while signalling a rate increase is coming “soon”, sets the stage for a probable rate hike in March.

In fact, according to the CME’s FedWatch Tool, the market is now factoring in a 9 out of 10 chance for a rate hike at the Fed’s March 2022 meeting. The markets actually see a greater chance of Fed funds being at 50-70bps (effectively a double hike), by the March meeting, than no rate change at all. The recent volatility in markets, with large swings even within the trading day, also suggests change is coming.

What’s Next?

Beyond that where should we expect rates to go for the rest of 2022? Here things are more nuanced. The most likely outcome, according to rate futures, is for rates to end 2022 at around 1.25%. That implies 4 hikes in 2022, up from an expectations of three hikes about a month ago. However, the range of outcomes remains very broad. Anywhere between three to six hikes are all possible in the markets’ view. The market sees rates rising fairly materially, but is unsure by how much.

In this context, it was also notable that there was no disagreement on leaving rates steady at the January meeting. Often when the market is uncertain on the path for rates, it’s because some decision-makers at the Fed are pushing for moves in rates against the majority decision.

We didn’t see any disagreement in the January release, though the release of the minutes may offer more detail. As much as the Fed claims to not focus on financial markets, the recent high volatility in stocks may have been a concern, since the S&P 500 is down just under 10% for 2022 so far at the time of writing. That’s a dramatically bad start to the year, since the downward move was so swift.

Risks

The uncertainty in where interest rates may move in 2022 appears to stem from two things in the Fed’s view. The first is inflation. Having talked a lot about transitory inflation in 2021, the Fed is now worried that inflation may persist for longer. If so that, may cause the Fed to become more aggressive with rates in an attempt to tame rising prices.

The second risk relates to the pandemic. As the Fed statement declared. “The path of the economy continues to depend on the course of the virus.” If the virus has greater economic impact in 2022, then maybe the Fed will be more cautious in its move to increase rates.

Nonetheless, the markets clear see rates going up in 2022. The main question is how much? Watching inflation and the path of the virus may provide some of the answer.

Source: https://www.forbes.com/sites/simonmoore/2022/01/26/fed-tees-up-march-hike-but-whats-next/