Odds Jump for Rapid Series of Rate Hikes This Year

The drumbeat is getting louder for the Federal Reserve to act forcibly against inflation this year.

Officials at the Federal Reserve at its last meeting penciled in three rate increases, with the median projection for the fed funds rate rising to 0.9 percent from 0.3 percent at the September meeting. That would be around the middle of a range of 0.75 percent to one percent.

Swaps now indicate a much more aggressive series of hikes. Prices of Fed Funds futures, which allow traders to protect themselves against rate changes, now imply a 97 percent chance of at least a hike to between 0.25 and 0.5 percent, including a 5.4 percent chance of the March meeting ending with an even higher rate. A month ago, the futures were pricing in just under a 50 percent chance of a hike.

There’s now around a 52 percent change of a second rate hike at the next meeting in May. As recently as Friday, the most recent trading day, the market was implying just under a 38 percent chance of the second rate hike coming in May. Back in December, the odds of a second consecutive hike were just under 17 percent.

The odds of a third consecutive hike have climbed to nearly 45 percent for the June meeting. On Friday they were closer to 30 percent. In December, they stood at around 11 percent.

The July meeting’s odds now show a 44.4 percent chance of three hikes and an 19 percent of a fourth hike. The odds of a fourth hike were just 11 percent on Friday and three percent a month ago.

Many futures traders warn against trying to interpret implications of futures prices beyond the nearest six months since trading on later dated futures tends to be thin. But it is worth noting that the market now implies a 41 percent chance of five or more hikes by the end of year, up from 36.3 Friday and 23.9 percent a week ago. A month ago, they were implying just a 9.8 percent chance of five or more.

And that Fed projection from December of just three hikes? That’s now given just a 20 percent chance.