Market Insider

Traders move up expectations for the Fed's first rate hike to the summer of 2022

Key Points
  • The futures market moved slightly following the Federal Reserve's announcement on tapering to show that traders now expect the Fed will raise interest rates one time by next July.
  • Previously, a full rate hike had not been priced in until the end of the summer, according to Wells Fargo's Mike Schumacher.
  • The Fed said it would begin to taper back its bond purchases starting this month, and some traders expect it will begin raising interest rates as soon as it has finished winding down the program at the middle of next year.
Jerome Powell, Chairman of the U.S. Federal Reserve, testifies before the Select Subcommittee on the Coronavirus Crisis hearing in Washington, D.C., September 23, 2020.
Kevin Dietsch | Reuters

Following the Federal Reserve's statement that it would start winding down its bond program, the futures market moved slightly to show that traders expect the Fed to raise interest rates once by next July.

Traders are betting the Federal Reserve hikes rates two times in 2022, and three more times in 2023, according to Fed funds futures contracts.

Following the Fed's 2 p.m. announcement, the futures moved slightly indicate traders now see the first full rate hike by July, from September, according to Mike Schumacher, director rates at Wells Fargo.

The Fed announced, as expected, that it would begin the process of tapering back its $120 billion a month bond purchases, starting this month. The market has been speculating the Fed would begin to raise rates shortly after the purchases are completed by mid-2022.

Before the meeting, the futures indicated about a 75% chance for a hike by next summer, but a full hike was priced in by September after the Fed statement. For the end of the year, expectations were unchanged with a bit more than two hikes, or 0.58 percentage points priced in, Schumacher said.

For 2023, traders are expecting three more hikes.

The Fed slashed its target fed funds target range to zero to 25 basis points at the onset of the pandemic.