Traders Keep to Bets Fed Will Raise Interest Rates by 25 Bps This Week

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting in Washington on Feb. 1, 2023. (Kevin Dietsch/Getty Images)

Traders of futures tied to the Federal Reserve’s policy rate have stuck to their bets of a quarter percentage point interest rate hike this week.

It caps a tumultuous week in which money market pricing experienced wild swings, with predictions of a 50 basis point move jettisoned after the collapse of two large regional U.S. banks prompted emergency action from the Fed and other regulators, and rates seen unchanged at one point, before traders by Thursday once again coalesced around a 25 basis point hike as fears of a new global banking crisis abated.

A trader in the 10-year bond options pit of the Chicago Board of Trade signal orders as a television screen shows the Federal Reserve's decision on short-term interest rates in Chicago on June 25, 2008. (Frank Polich/Reuters)

Policymakers now have almost all relevant economic data in hand before they convene on March 21–22, a year into a the fastest tightening cycle since the early 1980s designed to quash high inflation. While a key inflation report and jobless claims report last week suggested inflationary pressures are far from vanquished, a separate survey on inflation expectations released on Friday offered more encouragement.

The University of Michigan’s preliminary March reading of one-year inflation expectations fell to 3.8 percent, the lowest since April 2021, from 4.1 percent in February. Its five-year inflation outlook dropped to 2.8 percent, falling below the narrow 2.9–3.1 percent range for only the second time in the last 20 months.

The surveyors noted about 85 percent of their interviews were conducted before the failure of Silicon Valley Bank.

“To pause here would provide no relief to the idiosyncratic issues for banks, and the Fed would risk losing all of the hard-fought progress made in getting inflation expectations reanchored,” said Thomas Simons at Jefferies, who forecasts a quarter point hike at the upcoming meeting. “It is important to keep in mind that these expectations are predicated on the expectation that the Fed maintains its stance on fighting inflation.”

Economists polled by Reuters also forecast that magnitude of rate increase, with 76 of 82 of those surveyed predicting a quarter-point hike, bringing the central bank’s benchmark policy rate to a 4.75 percent–5.00 percent range.