It's increasingly clear that the Fed is now in the middle of one of the most-rapid tightening cycles ever. For next week's meeting, the market now sees an 18% chance of a 75 basis point hike with at least 50 bps as a certainty.
Just a few weeks ago there was talk about a pause after another 50 bps hike in July but now at least 50 bps more is priced in for September with more beyond.
Here's the most likely path, as implied by Fed funds futures:
June 15: 50 bps to 1.25-1.50%
July 27: 50 bps to 1.75-2.00%
Sept 21: 50 bps to 2.25-2.50%
Nov 2: 50 bps to 2.75-3.00%
Dec 14: 25 bps to 3.00-3.25%
That would be a cycle of five straight 50 basis points hikes (including last month) with the Fed trying to get back ahead of the curve. Into 2023, hikes continue to be priced up to 3.50-3.75% at this time next year.
CIBC boosted its baseline by 25 bps today but still thinks what the market is pricing is too much, and the way markets are tumbling, they may have a point.
Total annual inflation is set to remain elevated for longer, given the rise in oil prices and the continued pressure on food supply chains. While core annual inflation could still decelerate in June, that will reflect base effects. We'll need to see an unwinding of supply chain issues and a slowdown in shelter costs to drive inflation closer to target, and this data suggests that the Fed will want to get rates up a bit sooner, and a quarter point further, than our prior forecast. Four 50 basis point hikes this year will take the ceiling for the funds rate to 3%, but unlike market expectations for further hikes, we expect that to produce enough of a growth slowdown to quell inflation in 2023.
At this point, the top is unknowable but anyone looking to hold any kind of risk trade needs to shelter themselves against a storm in rates.