By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Futures on the federal funds rate on Wednesday have priced in a quarter-point tightening by the Federal Reserve by May next year after the U.S. central bank doubled the pace of tapering per month and flagged three rate increases in 2022.
The fed funds market has fully priced in Fed tightening by May. Traders have factored a 50% chance of a move in March 2022.
For 2022, fed funds futures are betting on three hikes consistent with the Fed statement.
The Fed, signaling its inflation target has been met, said on Wednesday it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate increases by the end of 2022 and another three in 2023 as it battles persistently high inflation.
The more liquid eurodollar futures market, meanwhile, indicated that the first Fed hike could either be in May or June, with three hikes factored in as well.
“It’s largely in line with market expectations. Markets are perhaps a little bit more hawkish than that,” said Gregory Daco, chief U.S. economist, at Oxford Economics in New York.
“But, I think it’s a fairly balanced view in terms of the outlook so from a markets perspective I don’t think it should trigger a massive tightening of financial conditions.”
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Pierog in Chicago; Editing by Diane Craft and Chizu Nomiyama)
