The markets are trying to anticipate whether the Federal Reserve is leaning toward a 25 basis-point hike or a 50 basis-point for its Interest Rate Decision in March. A rate hike is all but guaranteed, but the exact value of the hike is up in the air. The decision is due on March 16, so there is just under a month for investors to analyze the comments of Fed officials and set their positions.
With uncertainty surrounding the Fed’s decision, the USD and US stocks will possibly be in for a volatile ride. Investors will constantly be rejigging their positions as new information presents itself in the lead-up to the event. Immediately after the event, trading will likely appear exaggerated. Who is on the side of a 50 basis points hike?
Earlier in February, rate futures were pointing toward an expectation that the Fed would choose a 50 basis points rate hike to combat 40-year-high inflation in the US.
Remarks from St. Louis Fed President James Bullard was one of the main culprits for this expectation when he called a 50 basis points rate hike in March a "sensible approach." Producer Price inflation hit 9.7% YoY in January 2022, contributing to the market's expectations for an unusually hawkish rate hike.
Is A 25 BPS Hike More Likely?
However, expectations for a 50 basis points rate hike have cooled recently. Fed officials have begun pushing back on the probability of a rate hike exceeding 25 basis points out the gate. New York Fed President John Williams recently noted that he doesn't see "any compelling argument to take a big step initially."
Cleveland Fed President Loretta Mester sides with Williams with this assessment but doesn't "like taking anything off the table."