When the Fed meet next week, it's highly likely in the eyes of the both the bond markets and recent statements from Fed policymakers that rates rise. However, the prospect of a 50bps move that was suggested earlier this year is now largely off the table. However, looking beyond that, the market sees aggressive rate increased in 2022, perhaps more so than before the Ukraine invasion began.
A lot has changed, Russia's invasion of Ukraine has, in part, pushed global stock markets generally lower and various commodities including energy and, notably, wheat far higher.
If anything inflation may increase further for 2022 as higher energy and other prices, if sustained, could feed into many other goods and services. That puts the Fed in a tricky position. Yes, geopolitical tensions may have increased risk and disrupted supply chains. That and higher gas prices hurting consumer's wallets would make the Fed typically a little more cautious on rate hikes.
However, inflation may be trending higher still, in part because of these events, and the Fed has a mandate to keep inflation under control. At over 7%, it's not currently . Recession presents a mild risk too, according to some indicators , but the yield curve is not inverted, if somewhat flatter than previously. It's a difficult balancing act for the Fed.
More Hikes Expected
Despite the Ukraine invasion, the bond markets actually see arguably more aggressive Fed action in 2022, than they did just a month ago according to the CME's FedWatch Tool. Broadly speaking the bond market implies that we'll likely see between four and eight hikes by the Fed's December 2022 meeting as the most likely set of potential outcomes. Of course, that's a broad forecast and the Fed's data-dependence will likely cause the picture to evolve over the coming months.
However, currently the market sees the higher end of that range as more likely. The most likely outcome is now one additional hike from the Fed in 2022 as compared to early February. As such we're looking at a most likely outcome of six or seven 25bps moves, compared to perhaps five or six a month ago.
As always, it is difficult to untangle market events. It is likely that concerns about rates are pushing markets lower, just as much as events in Ukraine. Plus, these events are related because the invasion has pushed up commodity prices, feeding into inflation that the then Fed looks to fight with higher rates, among many other impacts and second-order effects.
Still, it's clear that recent events have not altered the markets take on 2022 being an aggressive year for rate hikes. In fact, slightly larger increases are now anticipated with the Fed perhaps moving up rates at each scheduled meeting this year. We should learn more from the Fed when they announce next Wednesday, March 16.
- Aussie, kiwi steady as dovish Fed keeps lid on dollar
- Virus worries wipe $420 bln off China's stock market
- What Ukraine Urgently Needs to Defend Itself
- Fed Cuts Key Interest Rate for First Time Since 2008, Citing Trade Uncertainty and Weak Global Economic Growth
- Asian shares up on China efforts despite virus worries
- Democrat criticizes Trump administration for giving Senate GOP Ukraine documents but not House
- Rupee soars to 16 month high ahead of US Fed meet; what does it mean for the economy and market?
- Fed chief: Economy looks resilient despite coronavirus risk
- Fed says risks to economy easing, but calls out coronavirus in report to Congress
- Taking Stock: Sensex back above 40K ahead of Fed outcome; time to book profits?
- 3-Point Analysis | US Fed maintains status quo, concerns grow over coronavirus outbreak
- Trump acquittal confronts Dems with election-year choices
- EM ASIA FX-Most Asian currencies weaken ahead of Fed meeting
- Family-of-five fed up with having one bathroom spend £49,000 renovating their home on Kirstie and Phil's Love It or List It - but 'frustrated' viewers point out they're still left with a single toilet
- GLOBAL MARKETS-Shares struggle for footing after virus-battered week
- The Year in Movies: Somewhere Over the ‘Rambo’
- Unilever chief anticipates year of crises as stock markets falter
- GLOBAL MARKETS-Asia shares fight for footing after turbulent week
- GLOBAL MARKETS-Asia shares struggle for footing after fraught week
- GLOBAL MARKETS-Asia shares struggle for footing after rough virus-scarred week
Despite Ukraine, Markets Still See Aggressive Fed Action This Year have 717 words, post on www.forbes.com at March 9, 2022. This is cached page on Business News. If you want remove this page, please contact us.