Fed outlook: What to watch for in the next FOMC meeting
Yahoo Finance's Brian Cheung explains what to expect in the next FOMC meeting as the Fed discusses speeding up its bond-buying taper.
Video Transcript
AKIKO FUJITA: We're beginning this hour, though, with the Federal Reserve. Jerome Powell and company taking a new direction in policy as inflation takes center stage. And we are seeing Treasury yields move on that news, falling on the lower end of the curve, with the 30-year yield sitting at the lowest level we've seen in 11 months. Let's bring in Yahoo Finance's Brian Cheung, who is tracking the very latest for us. And Brian, last week, we were already talking about potentially accelerating tapering of those asset purchases. Now, we're starting to hear more about interest rate hikes coming sooner than expected.
BRIAN CHEUNG: Yeah, well, nothing I love more than a little bit of rates chatter on this Monday morning. But of course, as you mentioned, interesting repricing happening in the Treasury market because of changing expectations around the Fed. Now we have to back up all the way to before Thanksgiving. Fed officials signaling that they were more likely to quicken the taper in their next meeting, which is December 15, and maybe increase the pace by which they would try to bring to a full close their asset purchase program.
Now then we saw on that Friday of that week on Black Friday the omicron variant identification, which had markets in a tizzy. Some people worried about whether or not the Fed might try to walk back its call for a faster taper. And then last week, we've got clear clarification from the Fed chairman in testimony to Congress that a faster taper is very much on the table. And a number of Fed officials, the Atlanta Fed president, the Richmond Fed president, the San Francisco Fed president, Fed governor Randy Quarles, all saying that they still supported a faster taper.
So that call's still on the table. You've seen what rates have done when you take a look, for example, at the Fed funds futures contracts that are now pricing in a 29% probability of three interest rate hikes by the end of next year. Now before, if we rewind to the beginning of November, the call on the Street was only for two interest rate hikes. Now what's going to be very critical is the dot plot projection, which we'll get in the Fed's next meeting. That will come out next Wednesday.
If you take a look at the September figures, which we have on the screen for you, you can see that at the time-- again, this was about 2 and 1/2 months ago-- only nine of the 18 members of the FOMC had seen the case for at least one interest rate hike by the end of next year.
Now, of course, with those repricing futures in the Fed funds futures contracts market and the commentary we've heard from Fed officials, the only direction for those dots that we should expect next week would be up. So, more than nine of the members plotting in the case for at least one interest rate hike by the end of next year. That could be very much new information for the Fed funds market and the Treasury market at large. So watch out for some volatility next week.
One other thing that's worth pointing out, however, any sort of bets on Fed funds futures markets not exactly so accurate. In the past, it's about as accurate as Russell Westbrook's shooting. So we have to keep that in mind, especially as we take a look at those Fed funds futures markets, Akiko.
AKIKO FUJITA: Can't avoid that dig, or you couldn't resist the dig, by the way, Brian.
BRIAN CHEUNG: I'm sorry.
AKIKO FUJITA: Any time we talk about basketball. I'm going to leave the Lakers talk on the side, but Brian Cheung bringing that to us. Thanks so much for--
