Rate Expectations

By Wes Crill, PhD, Senior Client Solutions Director and Vice President   |   Doug Longo, Co-Head of Product Specialists

Rate Expectations
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Mar 23, 2023

1 Minute Read

Topic

Market Volatility

Yesterday, the Federal Reserve raised the Federal Funds Rate by another 25 basis points. Fed watchers attempting to predict the ultimate rate decision had lots to absorb in the month of March. Market participants quickly reacted to news during this period, as demonstrated by comparing the prevailing Fed Funds Rate of 4.58% to the Fed Funds Futures Rate—the market’s expectation of where the Fed Funds Rate will be set in the future.

Fed activity of late has been directed at balancing two problems—inflation and financial instability,1 and both objectives were impacted by the events of March. Hawkish remarks by Jerome Powell on March 7 indicated a desire to raise the Federal Funds Target Rate by 50 basis points, in response to “stronger than expected” economic data.2 This was quickly followed by the Silicon Valley Bank (SVB Financial Group) collapse, prompting concerns about the greater economy. The Fed Funds Futures Rate dropped rapidly, suggesting investors interpreted economic concerns as a reason for the Fed to reduce its rate increase to 25 basis points.

This is a helpful reminder of how quickly markets incorporate news into prices.

Fed Funds Futures rates sourced from Bloomberg.

Footnotes

  1. 1Federal Reserve Faces Tough Decision on Rate Increase (Wall Street Journal, Mar 20,2023).

  2. 2Fed's Powell sets the table for higher and possibly faster rate hikes (Reuters, Mar 7, 2023).
  3. 3SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis (Wall Street Journal, Mar 13, 2023).

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