Chart of the Week
At his semi-annual hearing before both houses of the US Congress, Jerome Powell’s tone on the issue of inflation was rather hawkish. The Fed could raise rates again by 50 basis points if the data warrants it. Moreover, he confirmed the need to keep rates high for an extended period and that the final rate of the current cycle could exceed the 5.25% mentioned in the forecasts of last December.
From the Fed Funds futures, it is possible to form an opinion on market expectations of the future path of the Fed’s key rates. The chart above shows how investors’ expectations of the 12-month rate level have evolved. Thus, while between October and February of this year, investors expected a final level of slightly below 5%, they now expect a final rate of 5.5%.
The second curve shows that between November and February, investors began to value a rapid easing of monetary policy, in mid-January valuing the scenario of a peak in June slightly below 5%, and then a drop of almost 1.5% over the following year.
The data published since then has confirmed the resilience of economic activity and the continuation of significant inflationary pressures, leading the Fed to tighten its monetary policy further and interest rates expectations to rise. After the release of key figures, such as February’s inflation, the Fed’s March 22 meeting will undoubtedly provide a clearer picture of how far the central bank will be prepared to go.
The opinion expressed above is dated March 10, 2023 and is subject to change.
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