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Huge Chance of a Half Point Rate Hike in March, Fluctuating Wildly

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54 comments on Huge Chance of a Half Point Rate Hike in March, Fluctuating Wildly

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Rate hike odds courtesy of CME Fedwatch Tool.

The markets now expect the Fed will hike 50 basis points. 0.50 percentage point at its next FOMC meeting on March 16 according to CME Fedwatch. 

CPI Jumps Most in 40 Years

Consumer Price Index (CPI) data from BLS, chart by Mish

The jump in rate hike expectations follows a BLS report that shows CPI Jumps Most Since February 1982

Year-Over-Year Key Details

  • The all items index rose 7.5 percent for the 12 months ending January, the largest 12-month increase since the period ending February 1982.
  • The all items excluding food and energy index rose 6.0 percent, the largest 12-month change since the period ending August 1982.

Bond Market Reaction

US Treasury bonds reacted negatively to the data which was a bit worse than expected. 

Huge Rate Hike Probability Jump

Rate hike odds courtesy of CME Fedwatch Tool.

I believe this is the biggest single-day rate hike jump expectation in the CME Fedwatch history.

Expectations are fluctuating wildly however, and now at 71.5% as of 10:48:29 CT.

Twitter Discussion

Key point: The Fed does not like to surprise. I expect various Fed presidents to attempt to walk down this expectation.

Looking Ahead

Key Point: Rent is supposedly only up 3.8% YOY and OER, the largest CPI component, only 4.1% YOY I do not believe those numbers. A pending hot OER would be very problematic for the Fed.

OER stands for Owners’ Equivalent Rent. It is the mythical price one would pay to rent one’s own house from oneself, unfurnished and without utilities.

OER is 24.251 percent of the CPI. Rent of primary residence is another 7.398 percent. 

National Rent Index Is Up 17.8% Year-Over-Year

National Rent Index Year-Over-Year Courtesy of Apartment List

On February 5, 2022 I noted The National Rent Index Is Up 17.8% Year-Over-Year, the BLS Says 3.3%

The new numbers from the BLS, as of January 2022,  are 3.8% for rent and 4.1% for OER. I believe both numbers are low.

Addendum 

Double hike now 97.6%.

This post originated at MishTalk.Com. 

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54 Comments
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amalagoli
amalagoli
4 years ago
And what will 50bps really do to help mitigate the chip shortage and all other supply chain driven problems? Do we still believe inflation is a purely monetary phenomenon, and do we still believe the Fed’s main goal is to control inflation (as opposed to asset prices?)
Personally, I think this is all for show and I will be amazed if the Fed raises rates by even 25bps if any.
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Sunriver
Sunriver
4 years ago
I belive the FED has decided the 2030’s need to look like the 1930’s
Maybe the blow off top will be around 80,000 on the Dow followed by soup lines and civil unrest. These idiots at the FED are the biggest danger this countries has.
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RonJ
RonJ
4 years ago
Reply to  Sunriver
Other than the public health agencies.
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kiers
kiers
4 years ago
Reply to  Sunriver
inflation will usher in the 4th reich long before the “blow off top” with the country as agitated as it is!  All wars and eruptions start with central banks!
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Six000mileyear
Six000mileyear
4 years ago
The financial media fuels the erroneous belief the Fed controls the markets. The fact the yield on the 10 year Treasury Bond is now higher than 6 months leading up to COVID means markets are FORCING the Fed to raise rates. Former Chairman Volker is going to have to come out of retirement if the Fed is going to remain relevant.
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Mish
Mish
4 years ago
Get a load of this. For doubting the Fed will hike as much as implied, I am accused of being a permabull.
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Scooot
Scooot
4 years ago
Reply to  Mish
Obviously doesn’t read your blog lol
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Jackula
Jackula
4 years ago
Reply to  Mish
Freaking hilarious, somebody doesn’t do their homework!
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Sunriver
Sunriver
4 years ago
If a somewhat accurate measure of the CPI was in play (i.e. housing prices), the real (negative) interest rate might be something like:  -15%.
Has mankind somehow transcended any thoughts about ‘tomorrows food’ in complete favor of ‘the here and now’? 
What does the economy look like in say 2030?  It’s already a mess, but how are the next generations going to pay for the mess? 
Answer?  They won’t be able to pay.  The ‘Great Debt Reset’ is surely coming in the form of a Superman III conversion to Cryptocurrency.
It’s a good thing we have 64-bit processors in our computers to calculate all this debt! 
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Christoball
Christoball
4 years ago
Reply to  Sunriver
The next generation will get some relief from the Mother of all Jubilees that will occur in the form of a recession. It will mark everything to market rather than marking everything to leverage. We saw this in 2008-2009 as prices dropped all the way until 2013. People shredded dept in the form of bankruptcies and did not go to debtors prison. There was no stigma because so many people were in that boat and all were aware of the economic dysfunction. Inflation will be stopped by naturally declining markets . The Fed will not be able to keep pumping this thing up because it has been taking higher and higher injections to make marginal GDP increases or even achieving stasis. Higher injections will also risk Stagflation which will be too embarrassing. We have been warmed up psychologically with tapering to get us ready for rate increases. The talk of 50 basis points as probable means that the conditioning has been effective.
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thimk
thimk
4 years ago
here’s a historical  up to date recap of fed rate changes with the underlying event and gdp/inflation numbers.   
 
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TechLover1
TechLover1
4 years ago
Regarding rent increase % in BLS, here is the exact question asked:
The following questions, asked of consumers who rent their primary residence, are
the basis of the weight for Rent:
“What is the rental charge to your [household] for this unit including any
extra charges for garage and parking facilities? Do not include direct
payments by local, state or federal agencies. What period of time does this
cover?”
Notice the exclusion of payments by the government. As pandemic rent assistance winds down, I expect the BLS numbers to go up.
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Tony Bennett
Tony Bennett
4 years ago
7yr and 10yr toe to toe today.
At the moment inverted.
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TechLover1
TechLover1
4 years ago
Reply to  Tony Bennett
10 yr – 2 yr is close to 40 bps.
Severe recession warning.
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Tony Bennett
Tony Bennett
4 years ago
mortgage rates soaring today.
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Johnson1
Johnson1
4 years ago
Reply to  Tony Bennett
Local TV station said mortgage rates are back up to……the same rate as right before the pandemic and people are freaking out. LOL
4% is still cheap.   Especially if the rate of inflation is higher than what you can get a loan for.      Investors will keep buying homes if they can get a 4% mortgage when inflation is at 7%.  
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Johnson1
Home prices haven’t remained constant.
Doubters need to play around with mortgage calculator … and factor in rising property taxes and insurance.
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Mish
Mish
4 years ago
Double Hike odds now 97.6% – See Addendum
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TechLover1
TechLover1
4 years ago
Reply to  Mish
Yes. This is crazy.
Someone at the FED is going to talk this down any minute now.
They must address it and soon.
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Scooot
Scooot
4 years ago

In my opinion they’ll still raise by a quarter. The thinking will be that raising interest rates won’t fix supply induced inflation whereas the higher prices will eventually impact demand. Additionally they won’t want to keep fostering doubt about the size of each hike. 

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whirlaway
whirlaway
4 years ago
Volcker had to hike interest rates to 21% to deal with 14% inflation.   To deal with 7.5% inflation, short term rates have to go to 10% or more.  There is literally ZERO chance of that happening.   In fact, the Fed might barely be able to get 1/10th of the way before the whole damn market implodes.  
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TexasTim65
TexasTim65
4 years ago
Reply to  whirlaway
If you pull your money out of stocks where are you going to put it? Bonds and cash still pay way less than inflation, real estate very pricey and mortgage rates now 4% and rising with potential large property tax hikes to bail out local governments. 
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TechLover1
TechLover1
4 years ago
Reply to  TexasTim65
There is no place to hide.
It is indeed difficult to decide what to do.
You can park in cash but it will lose 8% in value just in inflation.
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TechLover1
TechLover1
4 years ago
The ferocity of move in the probability of 50 point move for March Fed meeting is stunning.
When I checked about half an hour after the CPI came out, fedwatch had a probability of 55% for a 50 point hike. As I type this comment it is 95%!
Rent increase as measured by BLS will soar later this year as leases are renewed at higher rent. BLS measures increase in all rentals whether new of existing (which is the correct way for purpose of CPI). The Apartment List numbers are for new leases signed. This is a leading indicator for increases in BLS as leases are renewed or people move and sign a new lease at a higher rent. Their landlord will lease at market rent as well once the current tenants move. So BLS will have at least several hot numbers going forward baked in already. No idea how the OER numbers will evolve going forward but if they come out hot, CPI will shoot up like crazy as it has such a large weight in CPI.
One other thing that will push CPI high in the near term is services price inflation. What we have seen in the past is goods price inflation. As mandates are removed and people start demanding services at pre-pandemic rates the price of services will soar. We have not seen anything there yet! Given the time it takes to hire and train and the current lack of employees, this may provide a huge tailwind for CPI in the next few months.
In the long run this is all deflationary as it will lead to a painful recession or even a depression but we may be a year or more away from it. Interesting times we live in.
I am actually not convinced at all that the FED will do 50 points in March. They want to delay the inevitable recession as far away as possible. It will be quite severe in any case so it must happen on someone else’s watch!
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TechLover1
TechLover1
4 years ago
Reply to  TechLover1
The pricing on CME for FED futures is totally haywire today. It is now pricing in seven to eight hikes by the end of 2022!
Stock market will be in deep depression territory way before that if that is the hiking path we are on. Many companies will not survive that big of a shock in financing costs. Margins are already pretty thin.
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Mish
Mish
4 years ago
Reply to  TechLover1
Totally agree with TechLover
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TechLover1
TechLover1
4 years ago
Reply to  Mish
Thanks for the response, Mish.
Do you know if retail investors can buy options on FED CME futures instruments? Or anything else that common person can buy that mirrors the same payouts? I am looking for options, not the straight futures instruments.
I really believe those futures prices are mispriced and there is an opportunity.
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kiers
kiers
4 years ago
Reply to  TechLover1
what max rate do you think market can take, BTW?  3%? 2%?
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TechLover1
TechLover1
4 years ago
Reply to  kiers
Your question made me think about this in a deeper way. I believe the real issue is credit availability, not necessarily a particular rate of interest.
Covenant lite debt has been issued with impunity last year just to pay interest on existing debt as many marginal corporations had no cash flow. These companies can theoretically come back to profitability and become healthy again. However, they need access to really cheap but more importantly covenant lite debt for the interim period. Look at what is happening to junk bond yields recently. Looks like credit will be getting tighter for weak companies going forward. This will likely lead to a lot of closures/mergers.
In any case, over 3% rate will kill many companies given their current margins and debt load.
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kiers
kiers
4 years ago
Reply to  TechLover1
hmm…my recent thoughts on this have me leaning toward the “buyback arbitrage rate”….as long cost of borrowing stays below dividend rate which for sp500 ~1.86%….? of course volatility has to be adjusted in too…the standard way = 1/2(sigma)^2 * (deltaT) which only LOWERS the calcualtion.   either way….not much room by any means.  
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honestcreditguy
honestcreditguy
4 years ago
Reply to  TechLover1
its a mid term year, expect no market crash….in fact after first qtr very bullish thru October. 1/4 pt next month. The fed has been trying to get inflation for 15 years of rate debasement and QE, it got it, now foreign money will pour into our treasuries, 30trillion in debt but safest money haven……
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prumbly
prumbly
4 years ago
Reply to  honestcreditguy
I don’t think the Fed got us inflation at all. Covid, and the idiotic government responses, to it got us inflation. As they unwind these measures, which they are doing, there’s going to be a period of the biggest DEFLATION the world has ever seen. And then it’s negative rates all the way…
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kiers
kiers
4 years ago
Fed: “Oh look, after 12 years of “looking for inflation”, thanks to a killer pandemic, WE ***”FOUND”*** INFLATION…….WE FOUND IT!   It was hiding in the Fed sofa…..!  Econ 101:  Deadly pandemics are great inflationary events.  Econ 101.  Everyone knows it.
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StukiMoi
StukiMoi
4 years ago
Reply to  kiers
“Deadly pandemics are great inflationary events”
They’re not. 
Printing money is the only inflationary event.
Using “deadly” pandemics as an arbitrary excuse to print lots of money is, hence, a great inflationary event.
Just like using “the system will collapse” as an excuse to print lots of money, is also a great inflationary event. As is “liquidity crisis”. And every other idiotic and pointless excuse that hopelessly stupid and illiterate yahoos can be suckered into believing is some sort of excuse to print money.
A “great pandemic” met with an interest rate appropriate for the increased risk a pandemic poses (say, 20%), wouldn’t be an inflationary event at all. Out of control money printing is what makes it appear to be. At least to those not-so-bright.
Wasn’t it Milton Friedman who quipped that inflation was always and everywhere a monetary phenomenon? He said a lot of weird stuff throughout his career, but that one he did get right.
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kiers
kiers
4 years ago
Reply to  StukiMoi
agree.  i was being sarcastic…..tongue in cheek-ish…….i just find the pretenses laid for the present moment rather……..BIZARRE/RECKLESS/LOONY
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Jojo
Jojo
4 years ago
The economy and people are bleeding to death due to ever increasing inflation but instead of reacting immediately and applying the necessary tourniquet, the FED says ‘no worries, give us another month or two.  If you’re still alive at that point, we’ll do something lame like raise interest rates a, …drum roll please…, 0.5 point’.  WOW, now that’s taking the bull by the tail and looking the situation right in the eye!  
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kiers
kiers
4 years ago
Reply to  Jojo
what u expect….they blow…..!   
err…they blow asset bubbles for the wealthy. The GFC of ’08 was largely in rear view mirror by 2012. Still kept QE…..to blow….the upper class.
It’s 2022 now,  why would they change their stripes now?  They serve wealth.  (Inflation = prophets)
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StukiMoi
StukiMoi
4 years ago
Reply to  Jojo
“The economy and people are bleeding to death due to ever increasing inflation”
Pretty much every single year since about 1910 or so. At a faster and faster rate….
“but instead of reacting immediately and applying the necessary tourniquet, “
Why would suddenly change course and do that now?
The Fed’s two mandates, are 1) to rob competent, productive people, and 2) to hand the loot so obtained to a connected leeching class of incompetents.
They do that by debasing the former’s money, and distributing the fresh print to the latter in the form of “asset appreciation.”
That’s what The Fed does. It’s their mandate. It’s their only mission. The only thing they have ever done. It’s why they exist in the first place. Why on earth would they suddenly change course now?
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RonJ
RonJ
4 years ago
“The Fed does not like to surprise.”
Unless it is to  the down side. In 1998, as the Dow approached a 20% decline, in the midst of the Asian Contagion, Greenspan suddenly made 2 closely spaced rate cuts totaling 3/4%, to 4.75.
On the first business day of 2001, Greenspan made an emergency rate cut from 6.5%, followed closely by another at the January meeting.
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Billy
Billy
4 years ago
When asked “are you encouraging the Fed to do a half point rate hike, to slow the massive inflation” Biden quickly responded by running out of the room.
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davebarnes2
davebarnes2
4 years ago
I fail to understand how the Fed raising rates will lower Apple’s [insert company of your choice here] profits.
Even if bond yield go up, their returns are still crap compared with stocks. So, I am not buying any bonds.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  davebarnes2
Twofer.
Risk of higher rate on debt  + strengthening $US (higher rate supportive of stronger currency).
Apple 10-K:
 To provide a meaningful assessment of the interest rate risk
associated with the Company’s investment portfolio, the Company performed a sensitivity analysis to determine the impact a
change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield
curve. Based on investment positions as of September  25, 2021 and September  26, 2020, a hypothetical 100 basis point
increase in interest rates across all maturities would result in a $4.1 billion and $3.1 billion incremental decline in the fair market
value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
As of September 25, 2021 and September 26, 2020, the Company had outstanding floating- and fixed-rate notes with varying
maturities for an aggregate carrying amount of $118.7 billion and $107.4 billion, respectively. The Company has entered, and in
the future may enter, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow
the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate
payments. Gains and losses on term debt are generally offset by the corresponding losses and gains on the related hedging
instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company’s debt as of
September 25, 2021 and September 26, 2020 to increase by $186 million and $218 million on an annualized basis, respectively.
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and
in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in
U.S. dollars. There is a risk that the Company will have to adjust local currency pricing due to competitive pressures when there
has been significant volatility in foreign currency exchange rates.
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MPO45
MPO45
4 years ago
Reply to  Tony Bennett
Really?  the numbers you posted are rounding errors for a 2.5 trillion dollar company.  And clearly apple is hedging with forex contracts.  nice try though.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  MPO45
 “in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars.”
…
Who wrote this??
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Scooot
Scooot
4 years ago
Reply to  Tony Bennett
“Such losses would only be realized if the Company sold the investments prior to maturity.”
Not sure of the relevance of this, unlike the Fed they’d still have to “mark to market” and incur a revaluation loss in their accounts wouldn’t they? Don’t know if you know? 
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KidHorn
KidHorn
4 years ago
Reply to  davebarnes2
It’s because a lot of company’s are only alive because they can continue to borrow at low rates. Once their interest expense starts going up, they’ll have to let people go. Fewer employed people=less stuff being bought. Another factor is fewer homes will be changing hands because people will no longer be approved for loans at higher interest rates. When people buy homes, they buy new furniture, remodel, etc… . So less spending on new home stuff.
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RunnerDan
RunnerDan
4 years ago
Reply to  KidHorn
“Another factor is fewer homes will be changing hands because people will no longer be approved for loans at higher interest rates.”
Well, maybe.  If someone has to sell their home, then they sell it at the highest price the market will support.  If that means less then what they paid a few years back, then they sell at a loss, but are a little consoled that the next house they are buying is also less expensive.  Bottom line, though, is this is a deflationary event.
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Johnson1
Johnson1
4 years ago
Reply to  KidHorn
Yep.   The companies that have to roll over their debt will struggle and see a drop in EPS.  But a lot of companies with good cash flows….like Apple, sold bonds at a lower interest rate than their dividends.  So they actually saved money by borrowing cheap money. 
As rate rise, they will take the cash flow and pay down the debt.  
Any way you look is higher interest rates could cause some companies to take a hit on EPS. 
But for companies without debt who can pass the price hikes on to the consumer….they will see EPS increase even if they do not increase the amount of gadgets they sell.  
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KidHorn
KidHorn
4 years ago
I don’t think it matters. Hiking in 50 chunks might be seen as positive in that it will push forward the date they eventually realize their mistake and start reversing course.
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Tony Bennett
Tony Bennett
4 years ago
The Federal Reserve will follow the market.
As always.
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Mish
Mish
4 years ago
Reply to  Tony Bennett
That is a bit simplistic. I have commented on that before and will repost the reasons. 
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Mish
Possibly.
But when was the last time the Federal Reserve surprised the market (in a negative way)?
In a positive way?  Let me count the ways.
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Mish
Mish
4 years ago
Reply to  Tony Bennett
You are missing the point – But I am sure you will get it when I repost it.
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vanderlyn
vanderlyn
4 years ago
Reply to  Tony Bennett
Dead on buddy.   Many times surprised moves to goose markets.   Hike surprises very rare.   Fed follows usually 
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