The Federal Reserve’s stance on increasing interest rates has become more hawkish as inflation continues to impact the U.S. economy. In mid-January, the market expected a total of only four, 25 basis-point rate increases in 2022. As of June 2, the CME Fed Watch Tool is projecting a total of 11, 25 basis-point rate increases in 2022. (Meeting Probabilities table below.)
If realized, the target range for the federal funds rate is projected between 2.75% and 3.0%. This would put the federal funds rate slightly above 2019 levels, but on par with levels seen in February and March 2008. (Federal Funds Effective Rate chart below.)
Chart Summaries
The CME FedWatch table analyzes the probability of the Federal Open Market Committee’s rate moves for upcoming meetings in 2022 and 2023 as of June 2, 2022.
Following the green squares in the matrix, which contain the highest level of probability, there is a 99.3% chance as of June 2 that the Fed will increase rates by 50 basis points in June. Probabilities favor rate increases at each of the Fed’s subsequent 2022 meetings -- another 50 basis-point increase in July and September and 25 basis points in the other remaining months. Looking out to 2023, the CME FedWatch chart shows February as the month with the highest likelihood (and it is slight) for another 25 basis-point increase.
The chart below shows the federal funds rate from 1954 through May 2022. The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates, such as the prime rate, but it also indirectly influences longer-term interest rates, such as mortgages, loans, and savings, all of which are important to U.S. consumers and the U.S. economy. Currently, the rate is 0.83 percent and between the target range of 0.75% and 1.0%. The target range would increase to 2.75% to 3.0% by year’s end if the CME FedWatch Tool projections are realized.
The yellow line on the right side of the chart illustrates how this projected level of increase from the CME FedWatch Tool would compare to historical levels. Additionally, the red line represents the midpoint, or the average, of the target range. If realized, the increase by the end of 2022 would be just above the 20-year average of 2.41%, but well below the time-series average (1954 through 2022) of 4.6%.
