Jun 13, 2022 - Economy

Investors think big Fed rate hikes are a done deal

Data: CME; Chart: Axios Visuals
Data: CME; Chart: Axios Visuals

Sometimes things change. For instance, expectations about Fed rate hikes.

Driving the news: Friday's sizzling inflation report reinforced surging expectations for Fed rate hikes this year.

  • This means traders and investors are overwhelmingly betting the central bank will hike hard and fast to rein in the sharpest price rise since the early 1980s.

Why it matters: Higher rates from the Fed could corral prices but at the cost of higher unemployment and slower — possibly negative — economic growth.

  • Oh, and fears of higher rates have done a number on the markets, where rising long-term rates — which the Fed helps determine — are key inputs in the formulas investors use to value shares.

How it works: This handy chart above is based on CME data from the market for Fed funds futures. It shows odds that traders, investors and speculators have placed on the Fed's target funds rate touching 2% by the Fed's September meeting. (It's now 0.75% to 1%.)

  • As recently as late March nobody in their right mind expected the Fed would push the funds rate to 2% by then.
  • Now Wall Street thinks it's a done deal.

Why the sudden shift? Inflation is having a moment.

  • As prices have climbed, people have realized the Fed is going to hike, hard and fast, to get it under control.

What to watch: The Fed's announcement of its next interest rate hike on Wednesday, and chair Jerome Powell's press conference. (Wall Street is near certain it'll be another half percentage point.) But Powell may set the stage for faster, higher hikes soon.

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