Fed to proceed cautiously despite war in Ukraine

The Fed is expected to hike interest rates by 25bp at the next FOMC meeting and, despite the war in Ukraine, unveil new projections showing five interest rate hikes for this year in total according to a new report from Capital Economics. They also expect those projections to show an additional four rate hikes in 2023, taking the fed funds rate to a peak of between 2.25% and 2.5%. 

Fed Chair Jerome Powell may offer more details in his press conference about the Fed’s plans for quantitative tightening (QT), but QT isn’t expected to be launched until closer to the middle of this year.

The fed funds rate is still expected to end 2022 at close to 1.6%, suggesting six 25bp hikes, close to pre-invasion expectations. But expectations for rate hikes in the following years have been scaled back more dramatically – with Dec. 2024 now below Dec. 2023, indicating that markets expect rates to peak sooner and at around 2%.