Chart of the week

Hawkish Fed to remain a challenge in 2023?

Markets don’t seem to believe Fed policy makers. This week’s chart looks at why market-based Fed funds rate expectations could drive volatility.

January 6, 2023 | 2 minute read

Rate expectations continue to rise

Source: Bloomberg Finance, L.P., as of January 5, 2022.

  • Hawkish minutes from the Fed’s December meeting combined with additional comments from policymakers this week may have dashed investors’ hopes for a clean slate for the markets this year, even as inflation looks to be trending lower. In fact, many of the same sticking points that held markets back last year remain in place and monetary policy remains chief among them.
  • Fed speakers have emphasized their resolve about taming inflation for months and did so again in December’s meeting in no uncertain terms. Policymakers noted inflation remained “unacceptably high” and rates could remain restrictive until they see the light at the end of the inflation tunnel.1
  • Against this backdrop, market expectations for the terminal (or peak) Fed funds rate have increased sharply over the past six months and rose again following the release of the December minutes.2 Yet, they also highlight a notable disconnect between markets and the Fed.
  • That is, despite policymakers’ increasingly blunt proclamations, markets continue to expect the Fed will quickly pivot toward lower rates in July 2023.2 Said another way, markets largely continue to hear what they want despite policymakers’ word otherwise.
  • This Fed-market disconnect proved troublesome on multiple occasions last year as volatility spiked in the face of hawkish policy stances and looks to remain in place entering the new year. Investors would be wise preparing for markets to remain choppy in the coming months.

  • Minutes of the FOMC December meeting.

  • Bloomberg Finance, L.P. as of January 5, 2022.

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