Another Fed Hike Is Coming; Mind The Dots
XM Group | Sep 20, 2022 04:34AM ET
How did investors get to the 100bps bet?
At its latest meeting in July, the FOMC delivered its second consecutive 75pbs hike, but Fed Chair Powell said that it may become appropriate to slow the pace of future increases, painting a picture that stood far from today’s reality. The Committee did not meet in August, but investors had the opportunity to hear again from the Fed chief at the Jackson Hole economic symposium. There, Powell appeared in his hawkish suit, saying that they will raise interest rates as high as needed and keep them there “for some time”. While he acknowledged that this could hurt economic growth as well as labor market conditions, he added that these are the “unfortunate costs of reducing inflation,” and since then, many of his colleagues agreed, with Cleveland Fed President Loretta Mester adding that interest rates should rise to slightly above 4%.
All this encouraged market participants to add to their bets over a more forceful Fed, but the icing on the cake was last week’s hotter-than-expected CPI data, which disappointed those expecting inflationary pressures to ease in the months to come and allowed others to place bets over a full percentage point rate increase at this gathering. According to the Fed funds futures, market participants are now assigning a 20% chance for such an action, with the remaining 80% pointing to a 75bps increase. This may have increased the risk of disappointment and thereby the chances for a setback in the dollar, even in the still very hawkish case of a third 75bps hike.
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