Expectations for the Fed’s next rate hike this month showed the biggest fluctuations since the start of the pandemic.

  • This month ahead of the FOMC meeting, the pricing of Fed fund futures was “frantic”.
  • Bespoke Investment Group says the spread in Fed fund futures in March was the widest since the start of the pandemic.
  • The banking crisis caused by the collapse of the SVB was a major factor influencing expectations of the Fed’s next move.

It was a case of March frenzy for the financial markets.

Short-term traders’ expectations of the Federal Reserve’s key interest rate have “been all over the place lately,” Bespoke Investment Group wrote on Tuesday, shortly before the Federal Reserve was due to make its March interest rate decision on Wednesday.

This month ahead of the FOMC meeting, Fed fund futures prices soared, locking in a 77.5 basis point spread between the expected top and bottom rates, the firm said.

This was the largest monthly spread since March 2020, when the Fed unexpectedly cut interest rates significantly outside of its regular meetings as it rushed to respond to the onset of the COVID pandemic.

Since 1994, when the Fed began announcing policy decisions on the day of its meetings, the only other months to produce such a wide range of federal funds futures have been January and September 2001 and January and October 2008.

“In contrast to the current situation, in each of these previous periods, the Fed has been cutting rather than potentially raising rates, and we were right in the middle of nasty bear markets,” Bespoke wrote.

Traders have had an eventful month trying to gauge the next rate move by the Federal Open Market Committee. Fed Chairman Jerome Powell opened the door for a larger-than-expected 50 basis point rate hike at the March meeting in early March as policymakers continue to work to contain inflation. He later told lawmakers that “no decision” had been made.

Then came the collapse and confiscation of Silicon Valley Bank, raising questions about the role of the Fed’s aggressive rate hikes last year in the bank’s eventual collapse.

The likelihood that the FOMC would raise rates by 25 basis points on Wednesday was about 83% at the end of Tuesday. This suggests that traders strongly expect the Fed to raise rates for the ninth consecutive time at the same pace in February. A month ago, traders were counting on a 76% chance. Since then, investors have seen massive bank runs, the first arrests of lenders since 2008, and a $30 billion bailout package for one regional lender, First Republic Bank.

“[Even] while we have seen huge fluctuations in Fed expectations this month, the S&P has been virtually unchanged since the beginning of the month,” Bispock said.

The chart shows the monthly volatility of Fed fund futures from 1994 to March 2023. Bespoke Investment Group

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