Markets “Throw in the Towel”

By last Friday (February 10), with the Fed’s unanimous FOMC view that the future held interest rate increases (plural), and reinforced by the spectacular +517,000 jobs numbers, the markets threw in the towel on their bet that a rate “pause” and subsequent “pivot” to lower rates would occur sooner rather than later and have resigned themselves to at least two more rate hikes in 2023’s first half. At January’s end (blue bars), markets had priced in just one 25 basis point Fed rate hike in March, and then a 25 basis point rate cut late in Q3 followed by another one late in Q4. But, by Friday, February 10, markets changed their view that the hawkish tone of FOMC members was just for show. The gold bars show market views as of Friday, February 10, prior to the CPI release. Clearly, even prior to the CPI release, market views were more in line with the Fed’s December dot-plot, and Powell and FOMC rhetoric.
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