Fed to Pivot Rate Cycle in December as Odds for Three Hikes in 2023 Accelerate

The U.S. inflation data that picked up at a faster pace than expected in January, raising concerns to the market that the U.S. Federal Reserve would maintain the rate cycle at a higher level throughout the year as well as raising probability for the next three meetings for 25 basis points each.


The current rate is in a 4.50%-4.75% target range as most central bankers believed interest rate at 5.1% would be sufficiently restrictive to bring down inflation.

However, after the report of higher-than-expected inflation data yesterday, the market is now seeing Fed Funds Futures pricing in an upper bound terminal rate of 5.5%, up from 5.25% earlier.

The meeting in March has 90.8% odds for a 25bps hike, while in May the odds for another 25bps hike is 74.8%. Though still divided between raise or keep in June’s meeting, the higher odds fall to a 25bps raise and will remain at 5.25-5.50% until the first cut which is expected to be in December 2023 by 25 bps.


Yesterday, inflation in the U.S. rose at a faster-than-expected pace in January 2023 amid rising shelter, gas and fuel prices, according to a report from the Labor Department on Tuesday.

The consumer price index for January rose 6.4% on an annual basis and 0.5% compared to December 2022, which were higher than forecast from economists surveyed by Dow Jones of 6.2% and 0.4%, respectively.

Meanwhile, core CPI which excludes volatile food and energy prices rose 5.6% from a year ago and 0.4% monthly, compared to estimates of 5.5% and 0.3%, respectively.


Fed officials stated on Tuesday the central bank will need to keep raising interest rates at a gradual pace to beat inflation as the job market remains high which could push borrowing costs higher than the Fed once thought.