LONDON (Reuters – The key currency market indicator now prices U.S. rates at a higher peak than originally forecast. It is a sign that traders are betting that the Federal Reserve will put inflation first and not worry about potential economic growth.

The war in Ukraine has sparked renewed commodity price rises and threatened more supply chain disruptions. A rethink of how quickly the Fed will increase rates is under way, considering that inflation stands at an all-time high of 8% for 40 years and growing.

The Fed will announce a quarter-point rate increase at its Wednesday meeting. There are six to seven additional moves this year. Also, traders are evaluating the “terminal”, which is where the federal funds rates will peak.

The expectation at the moment is that the terminal rate will be reached in the second quarter of 2023. On Monday, the implied yield, which is essentially a proxy rate for the fed funds rates, rose to 2.57 percent on September 2023 Eurodollar contracts. It is up by 57 basis point in one week and up 100 points this year.

The current range of fed funds is 0-0.25%

Thus, traders expect a terminal rate around 2.5%. The Eurodollar market had indicated that the terminal rate was closer to 2% for most of last year.

This new pricing aligns well with Fed policymakers’ median 2.5% forecast.

Sven Jari Stehn, Goldman Sachs’ (NYSE:), economist said that his bank has calculated a terminal rate between 2.75% and 3% based on its analysis. Stehn stated that higher rates are possible in a post-COVID environment, which has tight labor markets, high inflation, and green investments.

The Eurodollar futures indicate a higher peak, but they also suggest that rates will continue to rise for longer periods. While readings may be affected by lower levels of liquidity, current pricing indicates that rates will remain at or above 2% in the next 10 years.

There is the risk of being too aggressive in tightening. This could lead to recession.

Citi analysts said to clients, “One thing’s certain: the Fed’s guidance may change from hawkish toward dovish at one point.” Although there is some uncertainty about when Fed officials will need to ease their hands, this likely will be a shorter cycle than the previous ones.