Powell AI image
Strong data has kicked off something of a rethink regarding Fed policy today as the market looks at a higher-for-longer scenario.
In the initial aftermath of the data, the implied odds of a July hike rose to 92% from 85% but that’s since pared back to 89%, perhaps as the market looks towards a soft CPI next week or a weak non-farm payrolls tomorrow.
Further out, the market is now pricing in 37 bps of hikes at the November meeting, which is a full hike and a 50/50 chance of a second one.
Looking a year out, the implied rate is 4.97%, which is 10 bps lower today but that has plenty of tail risk priced in. If I had to estimate what the market is really trying to place as a baseline, it’s a hike to 5.25-5.50% and then holding there for about 10 months.