Why A Federal Reserve Interest Rate Hike Could Be Closer Than You Think

The U.S. Federal Reserve confirmed investor suspicions in December that multiple interest rate hikes are likely coming in 2022. The bond market is now pricing in the potential for the first rate hike to come sooner than many investors may realize.

Probability Rising: According to CME Group, the bond market is now pricing in a 56.5% chance the Fed will raise rates at its March 2022 meeting. While a 56.5% probability is far from certain, the probability of a March rate hike has been rising quickly in recent weeks, up from just 18.8% a month ago.

Related Link: Fed Ramps Up Tapering, Projects 3 Rate Hikes In 2022

In December, the Fed said it now anticipates three rate hikes by the end of 2022, which would potentially raise the target Fed funds rate from its current target range of between 0% and 0.25% to a new target range of between 0.75% and 1%. The bond market is now pricing in a 33.9% chance the year-end target range will be between 1% and 1.25% or higher.

The March 2022 Fed meeting is less than 80 days away, which means investors may be contending with rising interest rates sooner rather than later.

The Good News: DataTrek Research co-founder Nicholas Colas said Tuesday the recent bullish price action in the SPDR S&P 500 ETF Trust SPY is good news for investors that more hawkish monetary policy actions may not disrupt the stock market. Investors may even welcome more aggressive rate hikes as the appropriate response to concerningly high inflation levels.

Colas said the increasing expectations for a March Fed rate hike will make the Fed’s language at its January meeting even more important for investors.

“There is an FOMC meeting at the end of the month (Jan. 26), a perfect time for the Fed and Chair [Jerome] Powell to start conditioning markets if a March rate increase is likely,” Colas said.

Benzinga’s Take: Rising interest rates are certainly no cause for investors to panic and dump stocks. Historically, stock market cycles tend to peak roughly 12 to 24 months after the first rate hike of a new cycle.

Photo: Courtesy Federal Reserve