Can the Fed Thread the Needle?

May 03, 2022 | Jessica Noviskis, CFA, Associate Director of Alternatives

Five-line chart showing rate increases and number of FOMC meetings over 5 periods. Chart subtitle: The futures market expects the steepest pace of interest rate increases in more than 40 years. Chart visual description: Y-axis shows Rate Increases in basis points, ranging from 0 to 450. X-axis shows Number of FOMC Meetings, ranging from 1 to 17. Five lines span the chart by period. In green, 2022-2023; in dark orange, 2017-2018; in dark teal, 2004-2006; in blue 1999-2000, and in purple, 1994-1995. Chart data description: 2022-2023 line shows steepest pace, in a general arc from 85bps up to a projected 297.8bps in a span of 8 meetings. 2017-2018 went from 25bps to 175bps in a span of 15 meetings. 2004-2006 from 25bps to 425bps in 17 meetings. 1999-2000 from 25bps to 175bps in 8 meetings. And 1994-1995 from 25bps to 300bps in 9 meetings. Chart sources: Board of Governors of the Federal Reserve System, Bloomberg. End chart description.

All eyes are on rates this week as the Federal Open Market Committee (FOMC) convenes for the third time this year. In the seven weeks since the March meeting when the Committee raised rates an initial 25 basis points, continued inflationary pressures and an increasingly hawkish tone from Chairman Powell and other FOMC members have driven up market expectations for future hikes. The futures market has gone from pricing in a total of six 25 basis point increases and a year-end federal funds rate of 1.94% to ten hikes, including three consecutive 50 basis point increases, and a year-end rate of 2.81%. If market expectations prove correct, it would be the steepest pace of increases since the 1980s.

For a central bank that never quite normalized policy after the GFC, cooling decades-high inflation without tipping the economy into recession amid strained supply chains, a war in Europe, and COVID lockdowns in the world’s second-largest economy will be no easy task. Recent market volatility and sentiment reflect this uncertainty, with both equities and bonds down sharply year to date. While first quarter U.S. GDP “growth” of -1.4% missed expectations, the contraction was driven by trade and inventories as opposed to a consumer slowdown. The U.S. consumer is still strong, but the path forward is uncertain, with the yield on the 10-year Treasury — a key reference point for borrowing costs — briefly surpassing 3% yesterday for the first time since 2018. The Fed has to consider many moving pieces as it plans its path from here, and we look forward to hearing more about that process at Chairman Powell’s press conference tomorrow.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Jessica Noviskis, CFA
Associate Director of Alternatives

Get to Know Jessica

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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