Hawkish Fed to stay restrictive ‘all the way through’ 2025, NatWest economist says
The Fed’s interest rate projections caught some traders by surprise, in that they were much more hawkish for longer than many in the market expected.
Prior to the announcement, fed funds futures were pricing a target rate of 4.51 for fed funds after the March 2023 meeting. The Fed’s so-called “dot plot” released Wednesday shows a peak 4.6% in 2023.
“It’s really hawkish,” said John Briggs of NatWest Markets. He said the median rates are much higher than expected. “Basically they’re saying it’s front loaded but they are staying restrictive all the way through 2025.” In 2025, the fed funds rate median target is 2.9%.
“They’re basically saying rates have to go higher and faster and even if we have cuts in ’24 and ’25, they’re still going to stay restrictive into 2025. You don’t have them getting back to neutral until 2025. It’s pretty hawkish. It’s three years of tight policy.” The median fed funds forecast was still 3.9% for 2024.
Fed’s statement highlights ‘modest growth in spending and production’
The Federal Reserve’s updated statement shows that the central bank sees the US economy as strong, which could indicate that the Fed is comfortable raising rates significantly from here.
The new statement said that economic indicators “point to modest growth in spending and production.” That is a change from July’s statement, which said “recent indicators of spending and production have softened.”
Check out the full changes here.
Here’s what’s in the Fed’s forecast for future interest rate hikes
The Federal Reserve’s “dot plot,” its forecast for the path of rate hikes, shows that the central bank will boost interest rates up to 4.6% in 2023 before it ends its tightening campaign.
The Fed raised its benchmark interest rate by three-quarters of a percentage point to a range of 3% to 3.25%.
Read more here.
–Darla Mercado, Yun Li
Stocks slip following Fed’s announcement of 75 basis point rate hike
The major averages gave up their gains and traded lower after the Federal Reserve announced its 0.75 percentage point rate hike. The Dow Jones Industrial Average slipped about 240 points shortly after 2 pm ET. The S&P 500 dropped 0.8%, and the Nasdaq Composite lost 1%.
Federal Reserve raises interest rates by 0.75 percentage point, as expected
The Federal Reserve raised interest rates by 0.75 percentage point on Wednesday. It’s the third consecutive rate hike of that size. This increase brings the central bank’s benchmark rate to a range of 3% to 3.25%.
The central bank is raising rates as it attempts to tamp inflation. Investors have an ear out for what policymakers will say in their forecasts for the economy and the future path for interest rates.
Read more here.
Bond market unusually volatile ahead of Fed announcement, as traders bet on more aggressive hiking
Short-term Treasury rates surged ahead of the Federal Reserve’s 2 pm ET announcement, as traders bet the central bank will raise the fed funds rate next year to a peak well above current levels.
The Fed is expected to raise rates by three-quarters of a point, and that would take the fed funds rate range to 3.0% to 3.25%.
In the futures market, traders upped their bets on the rate level at which the Fed will stop hiking.
Ahead of the Fed meeting, the futures market implied fed funds would be raised to a peak 4.51% at the March 2023 meeting, according to Michael Schumacher, global head of macro strategy at Wells Fargo. On Tuesday, futures suggested that peak, or terminal rate, would be 4.50%. The Fed’s last forecast had that terminal rate at 3.8% next year.
“Normally, you wouldn’t see this kind of action before the Fed meeting,” said Schumacher.
The 2-year Treasury, which reflects Fed tightening, rose above 4% Wednesday for the first time since 2007.
The fed funds futures for December were pricing in a rate of 4.24% by the end of the year, he said. That was at 4.22% Wednesday.
The Federal Reserve is expected to hike rates by 0.75 percentage point
The Federal Reserve is expected to boost interest rates by three-quarters of a percentage point, marking the third time in a row that it’s hiking rates by that magnitude.
This move would bring its benchmark rate to a range of 3% to 3.25%, the highest level for the fed funds rate going back to early 2008.
Though the majority of market participants are pricing in a 0.75 percentage point rate increase, some are weighing small odds of a full point hike, according to the CME FedWatch Tool.
Central bankers’ outlook for the economy and the path of interest rates going forward will likely steal the show. Investors will watch for the Fed’s “dot plot” of individual members’ rate projections, as well as the “terminal rate” – the point at which policymakers think they can stop hiking.
Read the full story here.
–Darla Mercado, Jeff Cox
Yield on the 2-year Treasury pops to 4%
The yield on the 2-year Treasury note jumped to 4.006% shortly after 11:00 am ET, just hours before the Federal Reserve’s decision on interest rates. This was the first time the rate on the short-term note hit 4% since 2007.
The 2-year is particularly important as it’s the Treasury note that’s most sensitive to Fed policy.
The market’s concern over the Federal Reserve’s next steps seems to be emerging in the action in the 2-year note, according to Jeff Kilburg, CEO of KKM Financial. He pointed to the sharp run-up in Treasury yields.
“What’s interesting is the inversion and with the two-year above 4%, we are really pricing that the Fed is going to be much more hawkish for much longer,” he said. “And I think that’s a mistake.”