The U.S. Federal Reserve raised its target Fed funds rate by 0.25% earlier this month, its first interest rate hike since 2018. The Fed's updated dot plot projections are calling for six more 0.25% rate hikes in 2022, but the latest comments from Fed Chair Jerome Powell suggest the Fed may be even more aggressive with its rate hikes in the near term.
Powell's Latest Comments: On Monday, Powell told the National Association for Business Economics, “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
Several other Fed officials have also called for 0.5% hikes or said they would be open to them if economic conditions were appropriate. The Federal Reserve is stuck in a difficult position of attempting to rein in inflation by raising interest rates without triggering an economic recession.
The bond market is now pricing in a more aggressive rate hike path than the one the Fed laid out in its dot plot.
Probability Rising: According to CME Group, the bond market is now pricing in a year-end target rate range of between 2.25% and 2.5% and a 38.5% chance rate will be even higher by then. That range implies at least two 0.5% rate hikes sometime in 2022, a projection Bank of America economist Ethan Harris said Friday is likely accurate.
Related Link: How The Fed's Rate Increase Will Affect You
"Specifically, we think the Fed will do 50bp rate hikes in June and July 2022 and 25bp hikes at all other meetings until the policy rate reaches 3.00-3.25% in May 2023," Harris said.
As a result, he is expecting U.S. GDP growth to slow in the second half of 2022. Bank of America is now projecting U.S. GDP growth of 3.3% in 2022 and 1.8% in 2023.
Benzinga’s Take: Rising interest rates are certainly no cause for investors to panic and dump stocks. Historically, the SPDR S&P 500 ETF Trust (NYSE:SPY) has peaked roughly 12 to 24 months after the first rate hike of a new cycle.
Photo: Courtesy Federal Reserve
