Live Data Coverage: March Federal Reserve Meeting, Rate Decision

March FOMC Preview:

• Rates markets are certain that the Federal Reserve will hike rates today by 25-bps, but expectations for a 50-bps rate hike have dropped considerably since the Russian invasion of Ukraine.
• Global financial conditions are at their tightest levels since late-2011, which may give Fed Chair Jerome Powell a reason to take a ‘soft hawkish’ tone.
• We’ll discuss how markets may react to the March Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.

The Start of the Hike Cycle

Fed policymakers have taken a hawkish tone in the month leading up to the March Fed meeting, with several officials noting their openness (and preference) for a 50-bps rate hike to start the rate hike cycle. However, there is a clear schism in the commentary once Russia’s invasion of Ukraine began, with several policymakers noting the negative implications for US growth, which may warrant a more measured approach over the coming months. One thing is clear though: rate hikes are coming fairly consistently over the next few months – as will a balance sheet winddown.

There are seven 25-bps rate hikes discounted through the end of 2023 – exactly a 100% chance of seven rate hikes, in fact. The 2s5s10s butterfly has begun to widen in recent weeks, evidence that markets are refocusing on what the Fed will do and less on the market implications around Russia’s invasion of Ukraine.

EURODOLLAR FUTURES CONTRACT SPREAD (MARCH 2022-DECEMBER 2023) [BLUE], US 2S5S10S BUTTERFLY [ORANGE], DXY INDEX [RED]: DAILY CHART (MARCH 2021 TO MARCH 2022) (CHART 1)

Rate Hike Timeline

Fed fund futures have become less more aggressive in recent weeks, ever since Russia invaded Ukraine. Ahead of the March Fed meeting, traders see a 100% chance of a 25-bps rate hike, with a 13% chance of a 50-bps rate hike. This is down from its peak in early-February, when there was a 48% chance of a 50-bps rate hike. That said, rates markets still see significant odds of the Fed deploying a 50-bps rate hike in either May or June.

• March 2022 = $0B in asset purchases; first 25-bps rate hike (113% chance per Fed funds futures)
• May 2022 = beginning of balance sheet winddown; second 25-bps rate hike (167% chance)
• June 2022 = third 25-bps rate hike (189% chance)
• July 2022 = fourth 25-bps rate hike (73% chance)
• September 2022 = fifth 25-bps rate hike (55% chance)

We’ll discuss how markets may react to the March Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.

--- Written by Christopher Vecchio, CFA, Senior Strategist