The market dabbled with pricing in a small chance of a 50 bps hike this week and that probability briefly rose above 5% on Monday but yesterday's wage data gave the market comfort that the Fed will downshift and won't get to 5.00-5.25% and will quickly embark on a rate cutting cycle.
In any case, 25 bps is in the bag for today. The brewing intrigue is what happens in March.
Right now, Fed funds futures for the March 22 meeting are at 4.79%, which is well-short of the 4.87% that would be implied by two hikes. Put differently, it shows a 33% probability the Fed doesn't move at all in March.
Now the FOMC certainly isn't going to take hikes off the table today, so it's a question of how hard Powell pushes back against market pricing.
This is one line of thinking, and it appears as though that's which way the market is leaning:
I see the risks tilted towards US dollar strength and Powell doing a repeat of the December FOMC. The easiest way for Powell to establish credibility is to get to 5.00-5.25% even if that means a harder-than-necessary landing for the economy.
Yes, today's ADP data softened and yesterday's wage gains cooled but is it enough to make the Fed confident that inflation won't get stuck above 3%? I don't see how it can be, especially with signs that auto and home sales are picking up.
