Fed meeting preview 25 bps hike expected

Expectations are for the Fed to hike rates by 25bps at the March meeting which seems likely but traders should carefully watch the dot plot which indicates Fed members’ views of future rate hikes which could exceed market expectations.

Fed Chair Powell recently stated that “with inflation well above 2% and a strong labour market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”

In terms of his own personal view: “I am inclined to propose and support a 25bp rate hike.” He added that he saw a “series” of rate hikes likely thereafter. Finally he noted the Fed could “be prepared to move more aggressively by raising rates by more than 25bp” at one or more of their meetings.

The Latest Dot Plot - Could It Be More Hawkish Than the Market is Anticipating?

How much and how quickly the Fed will hike the dot plot will give clues. The last dot plot dates back to December, which pointed to three 25bp rate hikes for this year and another three for 2023. A lot has changed since December, and this time, the dots are likely to move higher. We could see a more aggressive and longer Fed hiking cycle than the market is currently pricing in, which we can see on the chart below:

In terms of the reduction of the Feds $8.9tn, it will probably be too early for Powell to give much guidance on when it will be reduced but the general consensus is they will probably look at it towards the end of Q2.

USD To Remain Firm Against Hawkish Fed & Russia Stagflation Shock?

Many investors see the Fed as being cautious given the Ukraine / Russia crisis but it’s important to keep in mind that the US economy has limited exposure to Russia which will allow the Fed to hike rates. The USD is likely to continue to remain firm against a backdrop of a robust economy, a central bank consistently hiking rates and a deteriorating overseas economic environment.

The stagflationary impact from the Russian commodity supply shock is a negative for global growth and especially for those economies in Europe and Asia where export trade and manufacturing are more important than in the US. The same logic applies to the emerging market economies.

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