Week ahead: Federal Reserve set to hike rates

Whilst headlines from Ukraine will be driving a lot of the market action, especially in commodities, traders are looking ahead to the Federal Reserve, which looks set to raise rates and embark on a tightening cycle. The Bank of England will also meet this week amid soaring inflation pressures for the UK. 

FOMC Meeting 

The Federal Open Market Committee (FOMC) meeting this week marks a turning point for the Fed as it begins raising interest rates. The question is not whether it will announce a 25bps hike at this meeting, but how many more are likely to follow. “I’m inclined to propose and support a 25-basis point rate hike,” Powell said during a March congressional testimony.  Chicago Fed president Charles Evans said the US central bank should raise rates close to neutral, which implies seven hikes this year.  BofA: “Labour market momentum is tremendous, and we expect labour demand to continue to outpace labour supply… In short, we still expect the Fed to hike by 25bps at each of its seven meetings this year, though Russia and Ukraine adds uncertainty”. Consensus is about 5 hikes. Markets will also be watching for any word about QT and what policymakers think about the economic impact of the war in Ukraine and sanctions on Russia. Presumably it means more inflation.

Bank of England 

Before the Russian invasion of Ukraine, markets were expecting interest rates in the UK to hit 1.75% by December and 2% by the middle of 2023. Traders have pared those bets back a bit, but the MPC is still expected to vote to raise rates by another 25bps to 0.75% this week. Two-thirds of economists polled by Reuters believe the Bank will raise rates for the third straight meeting. Almost half the MPC voted for a 50bps hike last time, meaning it seems all but certain the BoE opts hike.  

Ukraine War 

Commodity markets remain sensitive to developments in Ukraine, the West’s sanctions and any counter measures from the Kremlin. Last week saw high levels of volatility in various markets including oil, palladium and wheat as markets responded to events in Ukraine and worried about the potential loss of supply from sanctions.   

US Producer Inflation 

Consumer inflation is setting 40-year records and leading indicators show it’s getting worse. US producer price inflation numbers due this week are likely to be high again. Italy’s PPI for January came in at 41.8% – before the situation in Ukraine led to massive commodity price spikes.  

Major economic data