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US Fed Sending More Aggressive Signals

The FOMC just ended on 16 March 2022. Fed raised the Fed Funds Rate by a quarter of a percent and penciled in 6 more hikes for the year. And just 5 days after that on 21 March 2022, Jerome Powell sent the bonds markets down again with this message.

""If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so"

That tone is certainly a notch more hawkish than just a couple of days ago. Perhaps, they are finally acknowledging that they are behind the curve. But that said since when was Fed ever ahead of the curve or even in time?

This is what the Fed Funds Rate expectations look like now as implied by where the Fed Funds Futures is trading.

Fed Funds Rate Expectations (22 March 2022)
Fed Funds Rate Expectations (22 March 2022)

If this stands, then we could be looking at at least one 0.5% hike and possibly two 0.5% hikes over the next two FOMC. And at year-end, we are now looking at 2.5% instead, an equivalent of 9 quarter-point hikes for the year.

And this is how the expected Fed Funds rate has moved since the FOMC on 16 March 2022.

Fed Funds Implied Rate Changes
Fed Funds Implied Rate Changes

With heightened inflation and fallout from the Ukraine-Russia war in the background, Fed is definitely not in an enviable position. Raising interest rates more rapidly to control spiraling inflation without strangling growth and starting a recession - Can that even be done when there are external sources beyond their control that are fuelling it and that they are already late in mitigating it?

The next Core PCE Index release is on 31 March 2022. Let's see where we are heading.

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