The Fed voted in favor of a downshift and hiked interest rates by 25 basis points at Wednesday’s Fomc meeting. This was the latest development in the fight against multi-decade high inflation as policy setters prepare to end the aggressive ascent in the benchmark interest rate to a level that is deemed to be ‘sufficiently restrictive’.
So where is that level? Jerome Powell mentioned in the press conference that the committee is yet to decide where the policy rate will land up but remains open to “ongoing increases”, which Powell expanded on by stating that “ we’re talking about a couple more rate hikes to get to appropriately restrictive stance”. This suggests another 25 bps hike in March and then in May too which would bring the Fed Funds rate to 5.00 – 5.25% – aligning with the Fed’s December median dot plot projections of 5.1%.
However, markets don’t agree. In fact, the Fed’s admission that, “inflation has eased somewhat but remains elevated” was all it needed to double down on dovish bets that the Fed won’t hike above 5% and even seeing the first rate run in the second half of the year according to the implied rate below, derived from Fed Funds futures.