The Window Has Shifted

The CME Group FedWatch Tool tracks probabilities regarding future Fed Meetings and potential changes to the Federal Funds Rate ("FFR"). We periodically update Members when we see something of note which changes expectations and can potentially impact a repricing in various asset classes, namely equities and government bonds. 

In light of yesterday's red-hot PPI number, the ongoing Iran conflict seeing various commodities spike, and Fed Chair Powell's general focus on inflation at yesterday FOMC presser (even if he was on his heels), there has been a notable shift with regards to the next FOMC coming up at the end of April. 

Specifically, up until this point for the last few years the FedWatch Tool has always projected the odds of either holding steady at the current rate, or instead, highlighting odds of a rate cut at the given next FOMC. 

Here, however, you can see the left bar has the current FFR of 350-357 (which are basis points for 3.5%-3.75%). Previously, the current FFR has been on the righthand side of this graph, because the lefthand side would have the odds of a rate cut. 

But now on the righthand side we have the odds of a rate hike up to 375-400 (or 3.75%-4%). 

Needless to say this is a major shift, despite the President openly pining for emergency rate cuts and many doves at-large calling for more cuts at coming FOMC events. Furthermore, if Kevin Warsh's nomination runs into trouble we now know Powell will stay on as Fed Chair and his current hawkish bent could mean we actually do get that hike into the spring months. 

Taking this one step further, you must ask yourself if all of the high-flying AI growth stocks, the debt-laden commercial real estate stocks, and the private credit names can stomach a world where rates are not going lower, as many bulls had said would happen and thus pulled forward future growth by ramping these stocks endlessly higher.

In light of how leveraged the system is, coupled with how richly priced the AI/growth stocks have become, this shift should eventually break the bulls' rose-colored glasses in two. And even if there is no imminent hike, it now seems highly probable that Powell will not be cutting anytime soon unless and until we get a true collapse.