The Fed Will Go Hiking Next Year. The Question Is: How Far Will It Climb?

The Fed Will Go Hiking Next Year. The Question Is: How Far Will It Climb?
Andrew Rummer

about 2 years ago1 min

Investors are convinced the Federal Reserve (the Fed) will increase interest rates next year in response to US inflation rising to a four-decade high. The question everyone is asking, however, is how many hikes will be necessary.

As the custodian of the world’s biggest economy, where the Fed decides to set interest rates has a bearing on the price of all investments globally. The US central bank effectively sets the “risk free” rate of return available to investors, against which all other assets must compete. 

Data on Friday showed US consumer prices rose 6.8% in November from a year earlier, matching economists’ forecasts. Following the release, Fed funds futures (charted above) showed investors have priced in 2.7 quarter-point hikes in US interest rates by the end of 2022. A month ago they’d only projected 2.4 hikes. 

As we end 2021 and enter 2022, expect an increasing focus on when the Fed will start to boost interest rates – and how quickly they might climb.

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