Could The Fed Do A Double Hike Next Month? The Markets Think So

Often the Fed moves rates up or down in 0.25% increments, but markets currently believe that a move up in rates with the Fed’s decision on March 16 is virtually certain and the Fed may move rates up by 0.50%. That’s double a typical move. It would start to show the Fed is getting serious about inflation and could set off a series of hikes for 2022.

A Calm January

In a sense a big move in March would be surprising, because the Fed held rates steady in January with unanimous support from voting members of the committee. Of course, at the time the markets, and especially tech stocks, were falling and the Fed hadn’t seen the January CPI report which showed annual inflation of over 7%.

Of course, risks in Ukraine now weigh on markets too, and there will doubtless be other newsflow before next month’s Fed meeting. However, the Fed will be very interested in the next CPI report for the month of February, coming on March 10, just 6 days before the Fed’s next scheduled meeting.

Recent Dramatic Moves

The Fed has made dramatic moves when needed. Almost two years ago, in March 2020 the Fed held two unscheduled meetings to slash rates by 1.5% to effectively zero as the pandemic emerged. So a 0.5% move up next month, would be far less significant than that.

In fact, the Fed could call an unscheduled meeting if they wanted to, there’s no reason they need to stick to scheduled meetings if they wish to take action.

The Inflation Problem

For much of 2021, the Fed suggested that inflation would be transitory. That now looks optimistic. Inflation didn’t show any signs of calming in the January 2022 CPI report as the Fed may have hoped, in fact inflation may now be more broad-based than it was for much of 2021.

Housing

Worse, there are some reasons to think inflation may be running hotter than official estimates suggest. That’s because house prices seem to be increasing faster than CPI numbers imply. If so, that’s a problem, 7% inflation is something the U.S. hasn’t seen in 40 years, but the last time that happened inflation in the 1980s kept rising until it hit almost 15%. Previously, in the late 1970s inflation topped out at over 12%. It’s these potential outcomes that have the Fed looking to make a big move. Interestingly, the stock market isn’t too worried. Currently stock valuations remain high by historical standards, even though they have declined slightly in recent weeks.

Markets may not like it, but the Fed does have a mandate to target inflation of around 2%, currently inflation is more than triple that. That’s why a double move up in March could be on the cards.