Former Minister of Finance Lawrence H Sommer has pointed out that the final rate, as reflected by the Fed fund futures, has passed the 5% mark and this is a significant milestone. However, most of the potential surge in the current cycle has already happened, he said.
“The terminal rate just jumped above 5 according to fed funds futures[%]. It’s kind of a milestone. I think it’s more likely than not to go up more. But the increase from already more than 400bps in 18 months is certainly the biggest chunk of the increase we’ll see this cycle,” Summers tweeted.
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What it means: The Fed Funds Futures are financial contracts based on and traded on the Federal Funds Rate Chicago Mercantile Exchange. It reflects odds or market expectations of future changes in the Fed Funds Rate target range. Market participants use these contracts to hedge against potential fluctuations in policy rates that could affect their portfolio.
Interestingly French bank BNP Paribas expects the Federal Reserve to hike the fed funds rate to a peak of 5.25% in the first quarter of 2023, Reuters reported, citing a research note on Wednesday. The bank expects the U.S. economy to enter recession in the second quarter of 2023, the report said.
Fed outlook: The Federal Reserve has stated in its statement beige book the it expects moderate price increases overall just two weeks ahead of the central bank’s scheduled monetary policy meeting with a possible 75 basis point rate hike.
Stocks and bonds alike have been hit by the Fed’s aggressive rate action and forecasts of its future policy stance. That SPDR S&P 500 ETF Trust SPY has lost over 23% since the beginning of 2022, while the vanguard Total Bond Market Index Fund ETF BND has lost over 17% over the same period.
Summers has also offered his opinion on the overheated economy and what it would take to bring inflation back to target levels.
