Federal Reserve Ready for 25-Bp Rate Rise; Anticipate Stern Language From Powell

Federal Reserve

Federal Reserve Ready for 25-Bp Rate Rise

Speculators anticipate that the Federal Reserve will examine the current tightening effect by reducing the rate rise rate on Wednesday to 25 basis points from the 50 bp increase in December that followed four consecutive 75 bp hikes.

Investors may check for clues about when officials plan to ease monetary policy restrictions. However, analysts and investors believe Chairman Jerome Powell would fight back against market expectations for rate reduction later this year.

Using price information for fed funds futures contracts out 30 days, the CME FedWatch program predicts a 98.2% chance of a 25-bp rise, which would raise the target range for the federal funds rate to 4.50%-4.75%. It is hoped that the Federal Reserve’s quick tightening, which began in March 2022, would lower demand for goods and services, bringing demand more into line with supply and reducing inflationary pressures.

The rate rises seem to have an effect, as recent economic data suggests inflation has slowed over the previous three months. Inflation rates continue to soar over the 2% threshold the central bank has set as an acceptable tolerance level. Core personal consumption expenditures inflation, the Fed’s preferred gauge, increased 4.4% year over year in December, data released on Friday showed.

According to Matt Freund, co-chief investment officer and head of Fixed Income Strategies at Calamos Investments, the terminal rate is expected to be between 5% and 5.5%. He said that people would have to “wait for those delays to kick in” before they could see the results of their actions.

Senior economist at Interactive Brokers José Torres said, “The Federal Reserve does not look ready to announce the end of its tightening monetary policy. While products saw a 0.7% fall in price, services had a 0.5% increase, the largest monthly increase since September.”

According to the analysts at Morgan Stanley led by Chief U.S. Economist Ellen Zentner, the Fed is unlikely to announce the end of the tightening cycle. “However, the Federal Reserve will likely halt its rate hikes if weaker data emerges over the next six weeks.

” The market anticipates that the Fed’s guidance for “ongoing rises” would be replaced with “further increases.”

If nonfarm payrolls and CPI readings show “modest” inflation, as the Morgan Stanley analysts expected, “allowing the Fed to pause,” the policy rate might reach 4.625% at this meeting. They anticipate the rate situation to remain unchanged until the end of the forecast period in December 2023.

The federal funds’ futures market is pricing in a rate rise of 25 basis points (most remarks from Fed officials over the last month have also been consistent with this), while the likelihood of a policymaker deciding to raise rates by 50 basis points again is very low at 1.8%. If that happens, long-term Treasury rates will rise, and the stock market will fall. On Tuesday afternoon, the yield on a 10-year Treasury was slightly under 3.53 percent. Calamos analyst Freund predicted widespread market shifts.

It has been clear from recent Fed comments that the terminal rate will be higher than 5%, and no officials have shown a readiness to reduce for the remainder of the year. Minnesota Federal Reserve President Neel Kashkari predicted in early January that the rate would increase to 5.4% before leveling out.

However, the markets don’t seem to be reflecting this. According to SA writer Michael Kramer of Mott Capital Management, financial markets have relaxed to levels not seen since the spring of 2022, which might prompt the Fed to reverse its dovish position.

Chairman Powell’s remarks are expected to be “pretty sharp and quite non-supportive,” according to Freund since the market is misinterpreting the Fed’s message and pricing in rate cuts before the end of the year.

Traders, according to SA blogger Logan Kane, “are begging for a pivot,” but the Fed has shown no signs of rate decreases so far this year. He thinks that “cash is really the greatest hedge against inflation coming ahead” and that it will soon “pay 5% risk-free.”

The economic picture needs to be clarified, as stressed by Calamos’s Freund. “I don’t believe it’s a ‘and’; I think it’s a ‘or,’” he remarked, contrasting the common belief that a recession would be mild and brief.

A deeper recession is possible due to various factors, including a malfunctioning bond market or pressure on a financial intermediary. If that happened, says Freund, the Fed would immediately change policy. It will either be “extremely superficial” or “grind on,” he said.

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About the author: I'm a financial journalist with more than 1.5 years of experience. I have worked for different financial companies and covered stocks listed on ASX, NYSE, NASDAQ, etc. I have a degree in marketing from Bahria University Islamabad Campus (BUIC), Pakistan.