Investors are pricing in an additional 125-basis-point rate hike over the next 2 Fed meetings
- Investors on Thursday were pricing in 1.25 percentage points in additional rate hikes through the rest of the year
- The pricing suggests the fed funds target rate will hit a range of 4.25%-4.5% by the end of 2022.
Investors on Thursday were pricing in 1.25 percentage points in additional interest rate hikes by the Federal Reserve over its last meetings of 2022, the moves coming after policy makers delivered a third consecutive rate increase of 75 basis points to fight inflation.
The probability of a rate hike of 75 basis points at the November 1-2 meeting was 68.5%, according to the CME FedWatch tool. That's up from 60% on Tuesday before the Fed's September meeting and higher than 56.2% a week ago.
For the December 13-14 meeting, the odds of a rate increase of 50 basis points climbed to 66.7% from 43.8% on Tuesday and 46.3% a week earlier.
Such rate increases would leave the fed funds target rate at a range between 4.25%-4.5% when the December meeting ends. The Federal Open Market Committee foresees a peak rate of 4.6% in 2023, according to its Summary of Economic Projections.
The FOMC so far this year has kicked up its benchmark rate to a range of 3%-3.25% from zero percent as it tries to pull down inflation from around four-decade highs. August headline inflation cooled to 8.3% but exceeded expectations of 8.1%.
"We want to act aggressively now, and get this job done, and keep at it until it's done," Federal Reserve Chairman Jerome Powell said at Wednesday's press conference.
Policy makers slashed their growth expectations for 2022 to 0.2% from the 1.7% projection in June. They also expect core PCE inflation - its preferred gauge - to fall in 2023 to 2.8% from 5.4% this year, and the unemployment rate to rise to 4.4% next year from 3.8%.
"On our forecasts, inflation may be low enough for the Fed to pause the rate hiking cycle after the December meeting. However, if inflation does not come down as quickly as we expect and the Fed raises rates closer to 5%, it will be difficult to avoid a recession," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note Thursday.