Much of investors’ recent attention has been focused on the Federal Reserve and its plan to combat rising inflation. Year-over-year CPI readings have been recorded at levels not seen in over four decades.
The Fed has taken observers on a roller coaster ride in recent months in terms of expectations, Hooper wrote. At December’s Federal Open Market Committee meeting press conference, the Fed had pivoted more hawkishly, and then it pivoted again, more softly, with Russia’s invasion of Ukraine.
In the last month, expectations for rates, as represented by Fed funds futures, have shifted significantly, both in the shorter term and in the longer term, according to Hooper.
Fed funds futures indicated a month ago that there was a nearly 50% probability of a 50 basis point rate hike in March. Now, there appears to be 0% probability of a 50 basis point rate hike and a nearly 5% probability of no rate hike at all.
Hooper said that while expectations for the March FOMC meeting concluding this afternoon have turned more dovish than had been expected a month ago, expectations of where the Fed funds rate will be by December have also turned more hawkish than expected a month ago.
“The probability of 125 basis points in rate hikes by December have increased from 29.3% to 34.6%. The probability of 150 basis points in rate hikes have also increased – from 16.4% to 21.3,” Hooper wrote.
These shifts reflect competing concerns — worries about the impact on economic growth and financial stability in the very near term and worries about the impact on inflation in the coming months.
“One factor that the Fed will look to in determining how aggressive it is in tightening is inflation expectations. The Fed wants to ensure that inflation expectations for the longer term remain relatively well-anchored, and so that data will be an important consideration,” Hooper wrote. “The most recent data from the New York Fed’s Survey of Consumer Expectations indicated that inflation expectations for the one- and three-year periods had peaked and were starting to moderate. However, those results were compiled before Russia invaded Ukraine.”
Hooper said it’s also important to keep an eye on financial market-based indicators of inflation expectations. So far, the relationship between Treasuries and inflation-protected Treasuries indicates an expectation for higher inflation in the nearer term that moves lower in the longer term, although expectations for all time frames are elevated.
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