The first meeting of the Open Market Committee this year is behind us. The FOMC, as expected, decided to raise interest rates in the US for the eighth time in a row, this time by 25 basis points. Thus, the range of the federal reserve funds reserve ratio increased to the highest level since October 2007: 4.50-4.75%. Given that basically no one expected the Fed to make a decision other than half the rate hike than last December, what is more important from the perspective of the markets is what the governor of the US central bank, Jerome Powell, has to say.
Summary:
- at the February meeting of the Open Market Committee, as expected, interest rates increased by 25 basis points
- this means that the federal reserve funds rate range has increased to 4.50-4.75%
- Market expectations assume that the Federal Reserve will end the cycle of interest rate hikes after its March meeting, and that the beginning of the Fed 's rate cut will take place later this year
Fed decision in February 2023
At the first meeting of the Open Market Committee this year, an increase in interest rates by 25 basis points was approved . This means that the Federal Reserve Funds rate range increased to 4.50%-4.75% . Once again, the Fed did not surprise the market with its decision - long before the FOMC meeting, analysts agreed that the members of the committee would vote for a gradual phasing out of the monetary policy tightening in the US. On the eve of this year's first FOMC meeting, over 99% of positions on future interest rate contracts were betting on a 25 basis point increase in interest rates . Less than 1% of positions assumed leaving interest rates at last year's level (range 4.25-4.50%). It is interesting, however, that for the first time in many months, none of the participants of the FRA contracts market took into account the scenario of a 50 basis point rate hike. It is worth noting that at the end of December last year, over 32% of futures positions bet that the FOMC will vote for a rate hike of another 50 basis points at the February meeting.
Such a radical change in the proportion of future interest rate contracts within just one month is a clear signal that the baseline scenario for market participants is the imminent end of the interest rate hike cycle in the US.
Fed Chairman Jerome Powell's conference more important than the decision itself
Taking into account the fact that the Fed was a kind of hostage to market expectations and that a decision other than a 25 bp rate hike . would be quite a shock for him, more interest was aroused by Jerome Powell's conference after the FOMC meeting.
What next, i.e. when will the Fed stop raising rates?
The first interest rate hike in the United States this year is also the eighth in a row in this cycle of monetary tightening conducted by the Fed since March 2022. For investors from all over the world, however, it is important when the US Federal Reserve decides to end the rate hikes and when the first signals and then the first reductions in the dollar interest rate will appear. Looking at the current distribution of positions on FRA contracts of various series, it can be seen that market participants expect the end of the cycle of interest rate increases already at the third FOMC meeting this year , which is scheduled for May 3rd. More than 82% of positions on March futures bet that interest rates will also go up by 25 basis points at the next meeting. Less than 17% of positions on FRA contracts assume keeping rates at the current level (4.50-4.75%). As for the May series of futures contracts (which are betting on the third FOMC meeting this year), almost 55% of positions assume that the Fed will not raise interest rates in May , thus ending the monetary tightening cycle in the United States that has lasted over a year. The implementation of this scenario assumes an increase in interest rates in the US to the range of 4.75-5.00% .
An equally burning issue is when the Fed will begin to ease monetary policy
Of course, no one knows the answer to this question yet, especially since central bankers' decisions are shaped in a dynamic macroeconomic environment. In the coming months, a lot of things can happen that can both accelerate and significantly postpone the Fed 's decision to start interest rate cuts in the US. Much will depend on the rate of decline in inflation and the condition of the labor market. It is interesting, however, that on the day of this year's first FOMC meeting, most participants in the FRA contracts market expect that already at the end of this year... the Fed will start to cut interest rates.
For example, on the December contract series, over 30% of positions assume the range of the federal reserve funds rate of 4.25-4.50%, which is exactly the same as before today's Fed decision . More than 33% of positions assume the range of interest rates at 4.50-4.75% at the end of the year, which assumes the scenario of the last 25 bp rate hike this year . in March, means one interest rate cut at the end of 2023. The market therefore hopes that the Fed will quickly turn from a hawk into a dovish one that will not delay cutting rates as soon as the macroeconomic readings and the general climate in the US economy allow it.