Chart of the week

Fed funds rate shows no sign yet of retreating.

Could markets be due for more Fed-driven volatility ahead? This week’s chart looks at market-based Fed rate expectations, which continue to rise.

February 17, 2023 | 2 minute read

Market-based Fed rate expectations continue to rise

Source: Bloomberg Finance, L.P., as of February 16, 2023.

  • U.S. stocks are off to a strong start this year, with the S&P 500 up 6.8% year to date and recovering some of the steep losses from 2022.1 The rally was initially driven by investor hopes that Fed policy would soon turn less hawkish as inflation quickly cooled from its peak last year.
  • Stocks have stalled a bit recently; however, as investors increasingly realize we still may not yet have hit peak Fed hawkishness amid several recent upside economic surprises.
  • The labor market remains extremely tight, for example, as January jobs data nearly tripled expectations while the unemployment rate dropped to a 53-year low. Meanwhile, both consumer and producer prices came in higher than expected this week, again suggesting the Fed may have more work ahead of it as it seeks to tamp inflation.
  • Against this backdrop, the chart shows investors’ increasing expectations for the Fed’s terminal (peak) rate, which have yet to show any sign of letting up. Since February 8, the expected peak Fed funds rate has risen 10 bps, from 5.13% to 5.23% as investors digest strong recent economic data.1
  • Markets have mostly had a smooth ride so far this year. But each additional Fed rate hike creates the potential for renewed volatility within equity and fixed income markets. As rate hike expectations have yet to show signs of receding, investors may be wise to start preparing for further choppiness ahead.

  • Bloomberg Finance, L.P., as of February 16, 2023. U.S.

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