The Federal Reserve is poised to follow a half-of-a-percentage point interest rate hike in May with two even bigger rate hikes at subsequent meetings, traders bet on Friday, one day after Fed Chair Jerome Powell signalled he would be open to “front-end loading” the U.S. central bank’s retreat from super-easy monetary policy.
Futures contracts tied to the Fed’s policy rate now reflectoverwhelming expectations for a rise in short-term borrowingcosts to the 0.75%-1% range at the Fed’s May 3-4 meeting, and to a 2%-2.25% range by the close of its July 26-27 meeting.
Some economists are also newly pencilling in stepped-uppolicy tightening.
Jefferies chief economist Aneta Markowska on Friday said sheexpects the Fed to use a string of half-point hikes to get ratesto a 2.25%-2.5% level by September, a more aggressive path than she had previously anticipated.
And Nomura Research analysts, who now see the Fed delivering increases of 0.75 percentage points at each of the Fed’s June and July meetings, said Friday that market bets could help cement that actual outcome.
“Stronger (market) pricing for such a move would likely easethe path for the FOMC and participants could likely forge aconsensus on such action quickly,” they wrote in a notepublished early Friday.
Fed hikes rates, signals aggressive turn against inflation
The Fed lifted its policy rate by a quarter-percentage pointlast month in its first increase after what had been two yearsof a near-zero policy rate, though “many, many” Fed policymakers felt bigger rates hikes would be appropriate, Powell noted Thursday.
“50 basis points will be on the table for the May meeting,”Powell said. “I also think there’s something in the idea offront-end loading” the removal of accommodation, he added.
The Fed raised its target range for the fed funds rate to0.25%-0.5% in March, from the 0%-0.25% range it had been for the prior two years.
Adding to the sense of urgency, even dovish Fed policymakers like San Francisco Fed President Mary Daly and Chicago Fed chief Charles Evans this week embraced the idea of a half-point hike in May and of getting interest rates to a“neutral” level by the end of the year.
Most at the U.S. central bank say that level is likelybetween 2.25%-2.5% in the long run.
But with inflation as high as it is – consumer prices rose8.5% last month, well above the Fed’s goal of 2% – someobservers say interest rates will need to rise even further forthe “real” cost of borrowing to be high enough to start bitinginto economic activity.
Daly told reporters earlier this week that she believes2.25%-2.5% is still a “reasonable” estimate for neutral, butnoted that policymakers won’t really know until rates get closer to that level and they can observe what happens in the economy.