Fed Rate Hike In June Is Suddenly Seen As A High Probability By Traders

As the U.S. economy and inflation are significantly more resilient than many had anticipated, traders have increased the likelihood that the Federal Reserve would continue raising interest rates until June, which appeared unlikely only a few weeks ago.

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The Fed's primary benchmark rate objective was anticipated to peak this month at roughly 4.9%. On Wednesday and Thursday, though, traders were factoring in a 52% possibility that the fed-funds rate goal may increase to levels not seen in close to two decades or more by June — between 5.25% and 5.5%, or perhaps higher. This is after accounting for three additional quarter-point rate increases at each of the Fed's upcoming three meetings in March, May, and June. Nevertheless, traders also anticipated increasing likelihoods of a larger half-point increase being announced next month.

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After a string of unexpectedly positive U.S. data, including Thursday's wholesale prices report for January, Wednesday's retail sales figures, Tuesday's consumer price index report, and a huge jobs report two weeks ago, financial markets are currently readjusting expectations for how high U.S. interest rates could go.

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In addition to getting closer to the Fed's own forecast of a 5.1% fed-funds rate this year, traders are already exceeding it in some cases. According to the CME FedWatch Tool, the likelihood of a larger, half-point Fed rate hike next month increased to 15% on Thursday from 12% the previous day. The potential of a 6% fed-funds rate by September is also on the table, though it is only considered as a very remote 1.1% chance. Currently, the fed-funds rate ranges from 4.5% to 4.75%.

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"Investors are starting to wonder if the economy is truly slowing down at all as they observe the strength in the labor market and consumer spending. And if it doesn't slow down, the Fed will likely continue raising rates far until 2023, contrary to what we previously believed, according to Tom Graff, head of investments at Baltimore-based Facet Wealth, which manages $1.9 billion. "We don't think a fed-funds rate of, say, 6% is particularly likely, but it's something to think about,"

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Investors and traders had largely anticipated that rate hikes would halt soon until lately. This was true even though policymakers had previously mentioned the necessity for a 5.1% fed-funds rate in 2023 in their December Summary of Economic Projections. At his news conference on February 1, Fed Chairman Jerome Powell added that the central bank needs to see "much more evidence" that price pressures are abating before it can be certain that inflation is in fact falling.

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Loretta Mester, president of the Cleveland Fed, said on Thursday that she saw a "compelling" case for a half-point increase at the central bank's Jan. 31–Feb. rate hike. Her remarks added to the possibility that policymakers may need to become more aggressive with the size of their upcoming rate hikes. 1 meeting, where the increase was reduced to a quarter-point increment.

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It was thought that this week's revisions to rate expectations might be preparing the financial markets for more turbulence to come. The three main U.S. stock indices SPX, -1.17% DJIA, -1.02% were all lower in afternoon trade on Thursday, but they all still managed to post weekly gains.

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As the 2-year rate TMUBMUSD02Y, 4.631% held close to its best levels since November, the 10-year Treasury yield TMUBMUSD10Y, 3.832% crept approaching a new 2023 high, at 3.83%.

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