As recently as September 2021, half of the Federal Open Market Committee expected no change in the federal-funds rate throughout 2022, and not a single member expected a rate hike of at least 75 basis points. Financial-market participants were also complacent about the inflation outlook. Based on fed-funds futures contract prices, the probability that the Fed wouldn’t raise rates by December 2022 was 49%. Market participants had seemingly swallowed the Fed propaganda, namely that temporary supply-chain glitches were causing inflation, that it was transitory and wouldn’t require a change in policy.
The transitory world changed in a hurry. That’s because January’s consumer-price index inflation headline number screamed 7.5% and February’s screamed even louder—7.9%. As a result, more than half of FOMC members now anticipate a rate hike of at least 75 basis points by the end of 2022, and none think the rate will be unchanged. Fed-funds futures contracts are now pricing in an 84% probability that the rate will be above 150 basis points by December.
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