VOT Research Desk
Nov1,2022
Market Analytics and Considerations
Overview
Throughout September and October, Fed policymakers spoke in extremely hawkish tones, albeit a few FOMC members started to temper their tone in advance of the information quiet period.
Before the end of 2022, there may be further rate increases, but once 2023 rolls around, the Fed may start to ease up on its tightening.
Altogether, the markets are pricing in a 75 basis point rate increase in the week.
We’ll examine statements and remarks made by several Federal Reserve policymakers before the disclosure embargo period before to the November Fed meeting in this episode of Reserve Bank Watch. In general, Fed policymakers spoke in fairly aggressive terms in both September and October, rejecting the notion that the cycle of rate increases is complete and that a pause will begin initial or early 2023.
Whereas the Fed is dedicated to doing “anything it takes” to reduce inflation, it should be emphasized that right before the blackout window, the tone adopted by a few FOMC members started to soften, giving rise to intense speculation about the potential timing of a “pivot.” However, the stronger-than-anticipated September US nonfarm payrolls report and the hotter-than-expected September US inflation report (CPI) indicate that aggressive policy tightening efforts will persist in 2022.
MARKETS EXPECT MORE RATE INCREASES PRIOR TO A PIVOT
By comparing the difference in borrowing rates for commercial banks over a given period of time in the ahead, we can determine using Eurodollar futures if a Fed rate hike is being priced-in. To estimate where interest rates are headed through the end of this year, the spread between borrowing costs for the front month and January 2023 contracts is shown in Chart 1 under.
(Oct. 2022–Jan. 202 rough NOVEMBER 2022)] (CHART 1)3) [RED], DXY INDEX [ORANGE], US 2S5S10S BUTTERFLY [BLUE], Day Timeline (AUGUST Th
The DXY Index, the form of the US Treasury yield curve, and the probability of a rate hike by the Fed have all been closely correlated since the beginning of August. Eurodollar spreads are still anticipating a full 75-bps rate increase for the following Fed meeting in November and maybe another 75-bps rise in interest rates in December in the wake of yet another stubbornly hot US inflation report.
FED FUNDS FUTURES (November 1, 2022): Preconceptions FOR THE FEDERAL RESERVE INTEREST RATE (TABLE 1)
In the near future, Fed fund futures continue to be just as aggressive as Eurodollar contract spreads. In November, there is a 103% likelihood of a 75-bps rate increase (with a 100% chance of a 75-bps rate increase and a 3% likelihood of a 100-bps rate increase), and in December, a 50-bps rate increase is more probable (with a 100% chance of a 50-bps rate increase and a 47% probability of a 75-bps rate increase). The Fed’s main rate is anticipated to increase to a peak of 5.038% by May 2023 prior to the November Fed meeting.
