Traders in the fed funds futures market began to mount bets for five Federal Reserve rate hikes Wednesday following hawkish comments from Chair Jerome Powell. "The January 2023 contract is trading with an implied yield of 1.21%," BMO rate strategist Ben Jeffery said. "That's four and a chance of five" quarter-point rate hikes in 2022. According to Wells Fargo's Michael Schumacher, the market moved after Powell's news conference, where his comments on rate hikes and the Fed's plans to reduce its balance sheet were taken as hawkish by the bond market. Schumacher said the fed funds futures showed just a quarter-point hike for March prior to the Fed's statement and Powell's briefing. The Fed kept rates unchanged Wednesday , but signaled that its first rate hike since 2018 could come at its next meeting in March. The fed funds futures market also started pricing in chances for a half-point rate hike in March in the fed funds futures market. Ahead of the Fed's announcement, the March contract was at 25 basis points, and there was the equivalent of four quarter-point hikes priced for the year. After Powell's remarks, the March contract was at 38 basis points, or 0.38 percentage points. "That's a 20% of a 50 basis-point move," Jeffery said. "He did not seem to talk back any rate hike expectations at the press conference. He said they will do what they need to do to get inflation under control." Schumacher said the futures market reacted, even though Powell would not comment on whether the Fed would consider raising rates by a half-point to start the cycle. There has been market chatter speculating the Fed could start out with a bigger hike in March. "He didn't take anything off the table. He kept making the point it's a very different environment now than it was in 2015 when they started the last hiking cycle," said Schumacher, director of rates strategy at Wells Fargo. "It tells me the Fed is likely to be a lot more aggressive with interest rate hikes and the balance sheet reduction will happen a lot sooner than it did in the previous cycle."
Traders work on the floor of the New York Stock Exchange (NYSE) on January 18, 2022 in New York City.
Spencer Platt | Getty Images
Traders in the fed funds futures market began to mount bets for five Federal Reserve rate hikes Wednesday following hawkish comments from Chair Jerome Powell.