Markets Fully Price in Quarter-Point Interest Rate Hike in February as Inflation Slows
Markets are nearly certain the Federal Reserve next month will take another step down in the pace of its interest rate increases. According to CME Group data, prices Wednesday morning indicated a 94.3% probability that the central bank will raise rates by 0.25 percentage points at its two-day meeting on Feb. 1. If that holds, it would take the Fed’s benchmark borrowing rate to a targeted range of 4.5%-4.75%. While the probability is little changed since late last week, economic data Wednesday helped solidify the idea that after a succession of aggressive hikes – four consecutive three-quarter point increases in 2022, at one point – the Fed may be ready to let off its brakes a bit more.
The producer price index fell 0.5% in December, while retail sales were off by 1.1%. Both indicate that Fed hikes are pulling down inflation and slowing consumer demand. “We are changing our call for the February FOMC meeting from a 50 [basis point] hike to a 25bp hike, although we think markets should continue to place some probability on a larger-sized hike,” Citigroup economist Andrew Hollenhorst wrote in a client note. “Softer PPI will join with slower consumer price and wage inflation to most likely push the Fed toward a 25bp increment,” he added. However, Philadelphia Fed President Patrick Harker last week said he backs a slowdown. “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Harker, an FOMC voter, said Thursday. “In my view, hikes of 25 basis points will be appropriate going forward.” Traders in the fed funds futures market expect the central bank to push the rate up to 4.75%-5% by midsummer, then take it down half a percentage point by the end of the year. However, Fed officials estimated in December that they see the rate passing 5% this year and staying there, with no cuts likely until at least 2024.