Fed signals fastest tightening since 2006; market see more According to Reuters

By Ann Saphir

(Reuters) – Federal Reserve policymakers on Wednesday signaled much faster rate hikes this year than they expected just months ago, bringing them to around 1 .9% at year-end as they try to bring down soaring inflation.

The markets quickly priced in their deal, and then some, with trading in contracts tied to the Fed’s target policy valuation at 1.93% by the end of 2022.

The last time the Fed raised interest rates as quickly as policymakers expected was in 2004-2006.

Back then, they raised rates by a quarter of a percentage point at each meeting; Since then, they have been much slower to tighten policy, amid a weaker recovery and worsening inflation.

Fed Chairman Jerome Powell said that now, with inflation on the Fed’s preferred inflation gauge running at three times the 2% target, policymakers are “profoundly” aware of the need must stabilize prices and commit to doing so, Fed Chairman Jerome Powell said Wednesday.

But the exact timing of the rate hikes remains in question, with markets pricing in a high probability of a half-point rate hike in May or June.

Powell has remained open to that possibility, saying repeatedly that if inflation does not cool as expected, the Fed will accelerate rate hikes.

And in fact, seven of the 16 Fed policymakers that have outlined pathways for rate hikes will require a hike of at least a half point, if not more, this year.

“It is clear that the committee intends to send a positive signal of its determination to contain inflation and keep inflation expectations in check,” wrote regional chief economist Richard Moody.

The markets got the message.