With all the talk about rate hikes to come, forward guidance from the Federal Reserve's committee members and futures market signaling it is hard to capsulize the actions likely to be taken. Naturally, data continue to spit out on a regular basis and the committee makes adjustments as needed. The financial markets are not only trying to read the Fed correctly but also interpret the tea leaves from the same economic numbers the central bank is looking at.
So, what is the market expecting or pricing in for the remaining meetings in 2022? If the committee is true to its word and will be aggressive on rate hikes we can expect to see a 3% funds rate after the September meeting. That would be 75 basis point increase in July followed by another one in September. For the remaining two meetings after that this year the market is expecting between another 50 bps and 75 bps total (25/25 or 50/25). See the chart below for fed funds futures into December 2022.
It's often said if the market is pricing in something there is less need for volatility. That may be the case here, too, based on that the VIX (volatility index) is not rising sharply in the face of new economic or Fed-related news. That can be a dangerous situation, however, as it smacks of complacency and acceptance, where market behavior and psychology can certainly change on a dime.
This week we'll see more data directly related to inflation and economic growth. All eyes will be on the latest CPI and PPI readings, which recently ticked up to 40-year highs.
The talk of "peak inflation" continues to make the rounds, but there is little evidence yet to support this thesis. Retail sales were disappointing in May and point to a softer economy. If June confirms that weakness there will most likely be downgrades on economic growth. On a positive note, the June jobs report confirmed strength. So it's a tale of two cities.
There's so much to consider, but the Fed's main job and ONLY job right now is to do as much as possible to reduce inflation. While that may mean more rate hikes than anyone could imagine, it's the only way.
