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Traders Now See Fed Raising Rates 5 Times This Year

The consensus among traders shifted as Fed Chairman Powell gave hawkish commentary after the Federal Reserve meeting Wednesday.
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Interest-rate futures traders now expect the Federal Reserve to raise interest rates five times this year, according to the CME Fed Watch Tool.

Before the Fed’s meeting, which ended Wednesday, the consensus among many economists and investors was for four rate hikes this year. But Fed Chairman Jerome Powell issued hawkish commentary after the meeting.

He refused to rule out rate rises at consecutive meetings. “I don’t think it’s possible to say exactly how this is going to go, and we’re going to need to be … nimble about this,” he said at a news conference following the Fed’s meeting. 

He also said, “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”

Powell telegraphed that the Fed will begin raising rates in March, a starting date the markets had come to expect in recent weeks.

“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are ripe for doing so,” Powell said.

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As for the CME tool, it shows that federal funds traders see an 84% chance of a 0.25-percentage-point rate increase at the Fed’s March meeting and a 16% chance for a 0.5-point increase.

By year-end, traders see a 33% chance of 1.25 percentage points of tightening, which amounts to five quarter-point rises, and a 21% chance of 1.5 percentage points in tightening, which amounts to six quarter-point jumps.

A total increase of 1.25 percentage points would put the federal funds rate target at 1.25%-1.5%, while 1.5 points of tightening would put it at 1.5%-1.75%. It’s now zero-0.25%.

“My biggest disagreement with market pricing is in the context of a terminal rate in the cycle, where the market discounts rates topping at 2%,” Mark Dowding, chief investment officer of BlueBay Asset Management, told Bloomberg

“I think this is 100 basis points too low and see rates getting to 3% in 2024.”

A percentage point is 100 basis points.