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Traders bet the Fed will raise rates by 50 basis points in May & June


Jerome Powell is the Chairman of U.S. Federal Reserve. He attends National Association of Business Economics’ economic policy conference, Washington D.C., United States of America, on March 21st, 2022.

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The Federal Reserve Chairman Jerome Powell is being criticized for his tough talk about inflation. Traders believe Powell will increase interest rates faster than was expected.

In the fed funds future markets, odds are rising that the Federal Reserve will become more aggressive and raise interest rates by 50 basis points — or a half percent — at each of its next two meetings. According to the CME FedWatch ToolThe probability is better than 70%The Fed has reached 2.25% at the close of the year.

Powell shocks the market when he spokeMonday, at the National Association for Business Economics. He stated that inflation is “much too high” and that the central banks “will take all necessary steps to restore price stability. Fed funds futures have moved up in May and June, just as they did throughout the rest of 2018 and well into 2023.

Ralph Axel is a Bank of America rates strategist. He stated that there were 1.184 basis points, or 4.7 more quarter-point rate increases, priced into Fed Funds Futures for July. He said that there is a 73% chance for a 50 on May and 63% chance for a 50 on June. For a quarter-point movement, the July futures have a price.

The market sees more rate rises than what the Fed forecast last week. The central bank raised rates by a quarter point last Wednesday and released its forecastSix more rate increases of 25 basis points are planned for the remainder of this year. One basis point equals 0.011%.

To take a tougher stand on inflation

Powell said Monday that the Fed would be tough on inflation. According to him, there is the potential for rates increases that exceed 25 basis points if needed.

Fed Chief acknowledged that many central bank officers and economists had “widely underestimated” the duration of inflationary pressures from Covid. The war in Ukraine has driven prices of oil and other commodities dramatically higher, he said.

“Powell came out basically and made that point. Blake Gwinn (head of U.S. rate strategy at RBC) stated that we are now under one mandate. It’s all about inflation at the moment. They were open to the idea of ignoring any data on growth or employment while fighting inflation.

Terminal rates continue to rise.

Goldman Sachs economistsTheir forecast was updated late Monday to include half point hikes in May and June, and four additional quarter-point increases for the remainder of the year.

Markets now anticipate that the Fed will reach a high terminal rate or end rate before it ends the tightening cycle. The futures market predicts that the Fed’s fed funds rate will reach between 2.75% and 3% in September 2023.

Michael Schumacher from Wells Fargo said that “the terminal rate has skyrocketing” in the futures markets.

Schumacher stated that after peaking the futures start to indicate expectations of the Fed funds Rate dropping. By June 2024, it reaches the first quarter-point rate reduction. Futures indicate that the rate will flatten to 2% by 2025.

You can also ask them if they will walk it back the same way they did March or if they are going to just go with it. Axel agreed. Axel stated that the market had priced in a tightening cycle, which follows the 2017-2018 pattern. Then came three more cuts in 2019.

Axel stated, “It has been a fast forward of a complete cycle.” It’s easy to see all the hikes that are priced in, and all the cuts.

To reflect rising interest rates as well an inflation-fighting Fed, the Treasury market also moved strongly. This is the 2-year noteThis is the Fed’s most important indicator of Fed policy. It yielded 2.16% on Tuesday and was the 10-year noteThis was at 2.37%.

The last week has seen a change in tone as well as an increase in inflation. Both have been more difficult. It is amazing to see the market move. Schumacher stated that there has been absolutely no hiding place.