Fed traders now fully pricing in seven standard hikes for 2022

Traders have boosted their expectations for the amount of Federal Reserve policy tightening that could occur this year, moving at one stage on Monday to fully price in seven standard quarter-point rate hikes.

Traders have boosted their expectations for the amount of Federal Reserve policy tightening that could occur this year, moving at one stage on Monday to fully price in seven standard quarter-point rate hikes.

The last time the market for overnight index swaps linked to Fed meeting dates fully priced that much tightening was on Feb. 11, the day after U.S. consumer-price inflation numbers for January came in hotter than expected, prompting investors to wager on more hawkish central bank policy.

The rate on swaps linked to the December meeting climbed as high as 1.86 per cent Monday, 178 basis points above the current effective fed funds rate of 0.08 per cent. That’s equivalent to seven 25-basis-point increases, although the central bank itself has flagged that it could move in bigger increments down the line if necessary.

“It’s rational for the market to price in seven rate hikes for the year at this point in time,’ said Jason Bloom, head of fixed income and alternative ETF product strategy at Invesco. “The Fed is way behind the curve and consumer remains pretty flush at the moment, so they need to get back to 2 per cent or neutral pretty quickly.”

The swaps rate had reached as high as 1.87 per cent on Feb. 11, but then proceeded to fall in recent weeks, weighed down in large part by the financial market fallout from Russia’s invasion of Ukraine. It slipped to less than 1.2 per cent on March 1, suggesting at that point that traders were only envisaging between four and five standard hikes.

The latest uptick in U.S. market rates follows the war-related rally in global commodity prices that has helped to rev up investor expectations for inflation, which in turn means that the central bank might need to act more firmly in raising rates.