Today the Federal Open Market Committee raised the fed funds rate (upper bound) to 1% from 50bps. The most surprising element of the press conference was the Chairman dismissing that the committee is not “actively” considering a 75bps hike right now. This sent algos into overdrive sending stocks much higher on the day. In particular, the NASDAQ 100 is repeating a pattern we’ve seen before. While the index sold off into the March 16 meeting, the feel-good vibes coming out of Jay Powell sent the index almost 12% higher over the next 13 days.
NASDAQ 100 Index – Year to Date
Fed fund futures for December 2022 climbed from 1.895% to 2.355% during these 13 days and likely contributed to the briefness of the bear market rally.
Today the Fed Chairman led the market to recalibrate its expectations for the rest of the year. First, as mentioned before, he took off the table a 75bps hike… for now. Second, he affirmed expectations for at least two more 50bps hikes in upcoming meetings. So, let’s look out at the rest of the year through the lens of fed funds futures.
There are several observations that stand out.
First, as of today the upper end of fed funds is now 1%, so if we are being told the June and July meetings will result in 50bps rate increases each, the result would be an upper bound of fed funds at 2%. As such, the June contract that currently yields 1.105% and July at 1.43% seem out of whack if we were told today to expect rates to be by 2% by the end of July.
Second, when looking at the August and September timeframe, the market appears to expect another 50bps hike by September. If June and July futures shift upward as would seem appropriate, then perhaps the fed takes a pass in September.
Third, even though there is no meeting in October, today’s curve suggests a 25bps hike in October. No one asked about the possibility of an intermeeting hike today, so we don’t have any updated info on this score. Perhaps, September gets repriced to October’s level and the Fed goes another 25bps in September. Assuming there isn’t likely to be an intermeeting hike, it would suggest that the Fed goes another 50bps in November, and there is about a 50% chance they go another 25bps in December.
All of this is to say that the Fed is front-loading rate hikes like they told us they would. The market isn’t there yet in pricing this scenario. If near-term fed funds futures rise to reflect today’s guidance, any vigorous counter-trend rally in tech is likely to be limited in duration as June, July futures reset much higher, closer to 1.5% and 2% respectively.
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