In advance of the next Federal Open Market Committee (FOMC) meeting on March 15-16, 2022, the markets are anticipating that it will decide to increase the federal funds rate by 25 basis points (bp), raising the target range from the current 0-25 bp to 25-50 bp. This is in line with testimony given to Congress by Federal Reserve Board (FRB) Chair Jerome Powell on March 2-3, 2022. Before the U.S. House Committee on Financial Services on March 2, Powell said, "I'm inclined to propose and support a 25-basis-point rate hike."
Prior to that remark, Powell said, "With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month." His testimony was part of the semi-annual process in which the FRB reports on monetary policy to Congress.
- The next meeting of the Federal Open Market Committee (FOMC) is on March 15-16, 2022.
- Fed Chair Jerome Powell told Congress that he supports a 25 bp increase in the fed funds rate.
- Amid rising inflation and a strong labor market, the markets are anticipating a 25 bp rate hike.
- In the longer term, the markets expect the fed funds rate to reach 200 bp in early 2023.
Inflation Accelerates in February 2022
On March 10, 2022, the U.S. Bureau of Labor Statistics (BLS) released its February report on the Consumer Price Index for all Urban Consumers (CPI-U). This widely followed measure of inflation rose by 0.8% for the month, equivalent to a compound annualized rate of 10.0%. Over the past 12 months, the CPI-U rose by 7.9%, up from a figure of 7.5% recorded in January, for the largest yearly surge in prices since January 1982.
Rising gasoline prices, up by 6.6% in February, accounted for almost one-third of the total rise in the CPI-U during that month. As of March 14, the average price of regular gasoline across the U.S. was up by 24.0% from the average for February and up by 6.4% from the prior week.
The University of Michigan Consumer Sentiment Index (MCSI) fell to a new ten-year low in early March 2022. A key driver was falling real incomes, recently exacerbated by rapidly rising fuel prices. Inflation was the largest source of uncertainty among respondents. Moreover, the largest proportion of respondents since the survey began in the mid-1940s indicated that they expect their personal finances to deteriorate in the year ahead, mainly due to inflation.
Labor Market Remains Strong
Meanwhile, the U.S. labor market remains strong, with record high job openings and record low layoffs. The four-week moving average for unemployment insurance continuing claims, also called the number of insured unemployed persons, has fallen to its lowest level since March 28, 1970. Moreover, given that the U.S. civilian labor force has more than doubled since that time, the percentage of the labor force drawing continuing claims is as of March 2022 less than half what it was in March 1970.
As a result of persistently high and rising inflation, coupled with a strong employment picture, it appears to be a certainty the the FOMC will raise the fed funds rate at its March 15-16 meeting. The only question is by how much.
The Fed Funds Rate Now
At the last FOMC meeting, held on Jan. 25-26, 2022, members decided to keep the target range for the fed funds rate near zero but were ready to change this target in light of developments regarding inflation. While the target range has been maintained at 0-25 bp so far in 2022, the effective fed funds rate has been near the lower bound of that range, at 8 bp.
CME FedWatch Forecast
The Chicago Mercantile Exchange (CME) is the trading venue for fed funds futures contracts. The pricing of these instruments represents traders' opinion of where the official fed funds rate will be as of the expiration date of the contract. On the morning of March 14, 2022, the March 2022 contract was being priced to reflect an anticipated fed funds rate of 21 bp.
Meanwhile, the CME FedWatch Tool offers the "latest probabilities of FOMC rate moves" based on a complex analysis of fed funds futures contracts. On the morning of March 14, 2022, the continuously updated tool was assigning a probability of 97.8% to a 25 bp increase in the fed funds rate being announced at the March 15-16 FOMC meeting, which would raise the target range to 25-50 bp. The possibility of holding the target rate steady at 0-25 bp was being given a 2.2% probability.
A month earlier, on Feb. 14, 2022, the tool was predicting that a rate hike of 50 bp (which would raise the target range to 50-75 bp) was more likely than an increase of 25 bp (which would set the target range at 25-50 bp). The probabilities assigned to these outcomes back then were 60.8% and 39.2%, respectively.
Atlanta Fed's Market Probability Tracker
The Federal Reserve Bank of Atlanta has developed a "Market Probability Tracker" that "estimates the market-implied probabilities of various ranges for the three-month average fed funds rate." It uses data from these sources: three-month eurodollar futures, options on three-month eurodollar futures from the CME, three-month LIBOR/fed funds basis swap spreads expiring in 12 months, and the yield curve on U.S. Treasury securities.
On March 12, 2022, based on the prior trading day's closing prices, the Atlanta Fed's tracker assigned a probability of 99.11% to a 25 bp rate hike being approved at the FOMC meeting on March 15-16, 2022. It forecasts the average value of the fed funds rate over the three months following that meeting to be nearly 53 bp, rising to an average of 205 bp during the three months following the March 2023 meeting.
Meanwhile, on the morning of March 14, 2022, fed funds futures contracts expiring in February and March 2023 were anticipating that the fed funds rate will reach 200 bp by then.
Correction—April 24, 2022: This article previously misidentified the sole cause of rising gas prices as the Russia-Ukraine war.