Interbank Market News Scan: All quiet on the Federal Reserve front …

The media is saying this ….

The Chicago Mercantile Exchange’s FedWatch tool has done a 180 degree turn from its 9 February 2023 consensus that the Board of Governors of the Federal Reserve System would only increase its fed funds target range by 25-basis points.  The CME forecast a .908 probability of the Fed targeting a 475 to 500 basis point range.  By 2 March that probability fell to .686.  Today, the CME sees a .369 probability of a 25-basis point hike.  On the flip side, the CME sees a .631 probability that the fed fund target range will be 500 to 525 basis points.

In other words, given the current 450 to 475 basis point range, we could see a fifty-basis point increase in the fed funds rate.  

The business media is doing what it always does: focusing on one specific issue and dusting it with hype and steroids.  MarketWatch, citing statements by BlackRock’s CEO Rick Reider, is reporting that Wall Street expects the fed funds rate to reach six percent by the end of the year.

And while the CME has a .631 probability of a fifty-basis point hike, MarketWatch’s survey of traders is putting the chance of a fifty-basis point hike at .779.

U.S. News raised concern about the impact a fed funds rate would have on emerging markets. A high inflation, high interest rate environment is not a good mix for the emerging markets.  I can understand this view where not only could an emerging market’s currency get weaker, but a stronger dollar causes greater difficulty importing from the U.S.

Steven Blitz, an economist at TS Lombard, shared with CNBC his puzzlement as to why the Fed has been signaling 25-basis point hikes where fifty-basis points have been the norm. Also, he warned that investors should not be surprised to see the fed funds rate hit 6.5% this year.

… but the Congress is saying this….

Meanwhile, Congress remains, overall, quiet on the Federal Reserve and the fed funds rate and fed funds market. The heated exchange between U.S. Senator Elizabeth Warren and Fed chairman Jerome Powell centered on job losses that could result from the Federal Reserve’s pursuit of lower inflation.  Slowing down growth which could lead to lowered demand for goods and services could also mean the need for fewer workers. 

Mrs Warren has made no secret that she believes that Mr Powell should not be Fed chair and clearly intimated that an inability to conduct monetary policy without harming workers should be a factor for change in leadership.

As it pertains to the Federal Reserve incorporating labor concerns into its monetary policy decisions, Mrs Warren is a co-sponsor of S.496, the Respect for Workers Act.  S.496 is an amendment to the Federal Reserve Act that seeks to reaffirm the importance of workers by considering the distributional effect of monetary policy.     

Alton Drew

9 March 2023

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