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How Many Rate Hikes Does the Market Now Expect of the Fed?

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17 comments on How Many Rate Hikes Does the Market Now Expect of the Fed?

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I created the above graph in Excel manually typing in numbers as there is no data download from CME FedWatch. 

Target Rate Probabilities for December 2023 

Weighed Average Example December 2023

Now Vs a Month Ago

  • The market now sees a terminal rate of 5.36 percent in September, call it 5.25-5.50 percent.
  • A month ago the market thought the terminal rate was 5.00 percent in June. 
  • Previously, the market expected a peak in June followed by two or three 25-basis point cuts all the way to 4.32 percent. 
  • The market now sees a a cut from 5.36 percent to 5.0 percent.

The market has gotten the Fed’s message higher rates for a longer period of time.

However, the market is still expecting a bit more than one 25-basis point cut in December. 

Unemployment Rate Hits New Low of 3.4 Percent as Jobs and Employment Jumps But...

It was an allegedly strong jobs report that triggered belief in the Fed’s stance of higher for longer. 

For discussion, please see Unemployment Rate Hits New Low of 3.4 Percent as Jobs and Employment Jump But…

This post originated at MishTalk.Com

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17 Comments
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xbizo
xbizo
2 years ago
Smart to have real rates above zero. We haven’t had positive rates since 2008 because PCE understates inflation by at least 2% imo. By my personal measure of inflation (stuff I buy each week), it will not be negative. I expect inflation to pop up for a few months from what I’ve seen since Christmas, but that is an incomplete picture.
As far as the Fed terminal rate is concerned, it depends on if you believe PCE stays below 5.25%. Now at 5.0%.
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8dots
8dots
2 years ago
The Dow quarterly. Oct 2011 to Jan 2016 lows/ parallel from Oct 2014 high, an uptrend channel. A Lazer. Bubble down/ bubble up.
The Dow first/ last close below this channel was in Jan 2020. The line chart approach the top, but it might drop, because the Fed might hike in repetitions…
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Karlmarx
Karlmarx
2 years ago
The fed will have to either hike or qt faster than everyone expects. Does the market really think that there is a conservative republican majority in the house. Fiscal stimulus will continue of nor expand. It is what socialists always do and socialists (eg Liz Warren and her squad) still control all levers of government outside of the scotus
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vanderlyn
vanderlyn
2 years ago
the fed has never, ever, in their history been SO clear about their rate hiking plans for the past year. i’m just shocked there are folks out that are shocked and did NOT listen properly. seems like probably the biggest blunder in capital markets. pro tip. the fed is just re loading their bazooka, and telling everyone.
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8dots
8dots
2 years ago
Reply to  vanderlyn
yes, the question is when the Fed will be fed up with the stock markets, because the FANG were banged since Satya Nargila cashing in
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Nuddernoitall
Nuddernoitall
2 years ago
Reply to  vanderlyn
Your comment is spot on. As with you, I also am shocked people (and the market) imagine signs and signals that are not present. Once Powell understand inflation was not transitory, he has been consistent, in his actions and his communications, to lower it.
I expect at least two more 25pt hikes in 2023 and a third one a lesser possibility. Most importantly though, I expect zero rate reductions this entire year.
Inflation levels will decline over time, but we’ll still have to live with inflationary numbers that are more than 2 percent. For the foreseeable future, we will have to put up with the “irrational behavior” of markets watchers and AI computers on days Powell and Fed act. It’s so unnecessary vanderlyn because as you pointed out …. the FED has been SO clear about their plans.
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Nuddernoitall
Nuddernoitall
2 years ago
Reply to  Nuddernoitall
Correction: once Powell “understood” inflation etc.
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  vanderlyn
Hope, you’re not betting the farm on that.
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Salmo Trutta
Salmo Trutta
2 years ago
There’s a concerted effort to rewrite history, e.g., Alan Blinder.

Vt is an “independent” exogenous force acting on prices.

“Quantity leads and velocity follows”.
Cit. Dying of Money -By Jens O. Parsson

The rate-of-change in money flows, DDs, peaked in Feb. Obviously, Vt peaked in June and hasn’t yet declined.

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Jack
Jack
2 years ago
Reply to  Salmo Trutta
Vt acronym? Guessing velocity something.
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GruesomeHarvest
GruesomeHarvest
2 years ago
Mish, I hear a number of podcasters say financial conditions are now looser now than when the Fed started tightening. How can this be with rising interest rates and QT? Thanks!
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8dots
8dots
2 years ago
How many rate hikes : follow the Dow.
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8dots
8dots
2 years ago
The monthly Dow : take a line from 1929 to Jan 2000 highs. Switch to quarters, to 3 months, for fun and entertainment. The Dow closed
above the 100Y line in Jan 2021. For one year it stayed above. In Apr 2022 the Dow lost it’s grip. Option #1 : the 100Y plunge started now.
Option #2 : the Dow is turning around. Top #2 in Sept 2023 or Jan 2024 at 38K/39K. Option #3 : top #2 anywhere between 2023
and 2028/29, after 4Y or 7Y cycle. Option #4 : three tops. the last one, in mid 40K/50K, will fail to reach/breach the 100Y line and plunge.
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Salmo Trutta
Salmo Trutta
2 years ago
Reply to  8dots
Daneric’s Elliott Waves – Elliott Wave Theory, Technical Analysis, and Social Mood Commentary (danericselliottwaves.org)
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Casual_Observer2020
Casual_Observer2020
2 years ago
The real risk imo is they see inflation go back up and hike 50 bps. If oil production goes down prices continue to stay high we could get a repeat of 70s stagflation. In this scenario they would keep hiking until demand is completely destroyed.
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worleyeoe
worleyeoe
2 years ago
Reply to  Casual_Observer2020
And that’s what is increasingly likely to happen. At least over the next six months, inflation is more likely to pick up slightly and possibly move back towards 7%. With the labor market continuing to be so tight, the Fed may have to hike by 25-basis point all the way through at least Sept, putting the FFR at 6%. Until we see at least a month of sustained 250K initial jobless claims, then there’s no recession in sight. So far, the 450-basis point hikes have done virtually nothing to slowdown the economy. And to-date, the Fed has gotten absolutely nothing right, so I agree with Bullard that a 7% terminal FFR may be needed to squash demand.
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Maximus_Minimus
Maximus_Minimus
2 years ago
I don’t know what the rate will be.
The more important question is whether the FED is a born again (Christian), and start doing what it should have been doing for a looong time now.
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