Everything You Should Know About Rate Hikes in 2022

There could be a political undercurrent to the Fed's rate hike decisions

Managing Editor
May 4, 2022 at 11:20 AM
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On Monday, Schaeffer's Senior Market Strategist Bryan Sapp, CFA, had some particularly interesting commentary on the Federal Open Market Committee (FOMC) meeting. Below is the transcript:

"Everyone seems to have their own opinions about where the Fed is headed from here, and we're going to look at some data showing there was an interesting shift in Fed expectations that happened last week. A lot of front-loaded hikes are essentially being assumed will happen.

The main event will feature a Fed rate decision. It's pretty much a foregone conclusion at this point that the Fed is going to hike by 50 basis points. Specifically, over 99% probability now in the Fed Funds Futures, per CME Group. Everyone knows that that's coming.

To me, the most important thing, or the most important tidbit, to look at is the balance sheet run-off, first and foremost. The Fed has been signaling for a long time that they're going to start selling some of these debt instruments that they've been holding. I am curious to see the pace of the last time they signaled when and the pace. Last time they said about $90 billion per month. They raised the limit of the amount that they would be able to raise per month. It will be interesting to see if they pull back on that at all. They probably won't but if they do, I would think that that would be really bullish for the stock market. Again, it's not about “what", it's about what happens after the decision.

So, if you rewind back to the March Fed meeting, everyone knew a rate hike was coming. Twenty-five or 50 points was the big question. We ended up getting a 25 point hike. Everyone had kind of favored that. But if you go back and look, the March meeting was on the 15th and the 16th. And that was actually right around the time that the market bottomed. So that hike basically preceded a very sharp rally higher. That does not necessarily going to mean that we're going to rally again on this hike. But it's something to keep in mind.

Everyone sold the rumor and then bought the news, the opposite of what you always hear, which is “buy the rumor, sell the news.” We'll see that it may be set up for that kind of trade again. The best way for that to play out would be weakness today and tomorrow heading into the hike news. And then, if you see a bounce on that hike, then maybe that could be a signal that we're in for a little rally in the market.

Let’s talk about the Fed and the big, big, big change last week. What's even more interesting to me is this happened during a week when the markets sold off sharply. We’re just going to assume that we're getting 50 basis points on Wednesday. That would bring the current target range to 75 to 100 basis points. So, right now, the basement rate is 75 basis points, or 0.75%.

As of a week ago, looking forward to June, the market was was pricing in a 76% chance of a 75 basis points hike in June, which everyone thought was kind of crazy. But that came on the heels of Powell at that Economics Symposium where he was really hawkish and he had just came out and said that inflation is their first goal, we need to fight that, yada yada. So, I thought that was a little bit aggressive just to go ahead and assume that we're going to get a 75 basis-point hike in June. Well, fast forward to this morning and we're now at 93% probability for 75 basis points hike in June. So it's almost to the point where we're just assuming that we're going to get another massive hike at the Fed meeting after this weeks. That's a little worrisome.

Fed Watch April 25


Fed Watch May 2


Looking at June and assuming the 75 hike, that puts us 150 to 175. And if you look out to July, they're basically assuming a 91% probability of a 50 basis points hike in July. So, to me, it looks like we're getting 50 this week, we're getting 75 in June, and we're getting 50 in July. So very, very front-loaded, aggressive action being taken by the Fed.

Fed Watch July

If you look at July of 200-225, let's just assume we're going to be there. Let's fast forward from July to December. And between July and December, you're going to have three more Fed meetings. Right now, what the market is saying is that over the course of those three Fed meetings, we're looking like we're only going to hike (I say only because the hikes are so aggressive up front) three or four times into December over those next three Fed meetings. 25 basis point hikes, when I say three times I mean, three total 25 basis point hikes.

Fed Watch December



Fed Watch December Final


So, what does that do? It's even more interesting that this is an election year. I don't think this is a coincidence. The Fed is supposed to be apolitical. Let's not kid ourselves: politics are involved with the Fed. So, if they have all these hikes in July, that gives them a couple of months ahead of November to sort of resituate and recalibrate the Fed’s expectations and signal to the market what they're planning on doing. In my opinion, they're going to come out and they're going to do everything they can to hammer this right out of the gate, hammer inflation, push it all down. And, if the CPI data, if other data comes in a little softer than what they had expected, that leaves the potential for the Fed to let off the gas a little bit with the hikes. Again, this is all very front loaded.

It's kind of insane to me that, that all of that matters, right? The Fed is all that matters right now. And it sounds nuts, but it really is all it matters. Everyone is looking at the Fed and saying, “Are you going to let this market rally? Are you going to crush it? How serious are you about this no inflation or 2% inflation mandate?”. It’s just very interesting that we have a couple of months, they're in the middle of the year where they may sort of, you know, lay off a little bit, and that could set us up for a rally. That's something to keep an eye on as we progress through the summer."

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