U.S. rate futures keep bets on peak rate after Fed move, eye cuts in 2023

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Adds Fed's Powell remarks, analyst comment, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 1 (Reuters) -Futures tied to the Federal Reserve's policy rates maintained their bets that the peak fed funds rate will hit just under 5% in June this year, pricing in rate cuts as well by the end of 2023, according to Refinitiv's FedWatch on Wednesday.

The rate moves came after the Fed on Wednesday raised interest rates by 25 basis points, as expected, but continued to promise "ongoing increases" in borrowing costs as part of its battle against inflation.

Fed Chair Jerome Powell, in a press briefing after the rate decision, emphasized that recent progress on inflation - while "gratifying" - is still insufficient to signal an end to the rate hikes.

But he also gave a nod to disinflation, noting that it is in its early stages. He added that there is a path back to the Fed's 2% inflation target without a significant economic downturn, and the central bank may be only "a couple of more rate hikes" from the level it deems is sufficiently restrictive to bring inflation down.

Following his remarks, U.S stocks rallied, Treasury yields fell, and the dollar tumbled.

U.S. rate futures factored in a terminal rate of 4.89% late on Wednesday. The Fed, however, projected earlier on that it will raise its key policy rate to between 5% and 5.25% and keep it there at least until the end of the year.

At the same time, the futures market expects rate cuts this year, with the fed funds rate seen at 4.39% by December 2023, or about 50 bps of cuts from the peak rate.

"Powell confirmed his expectation that the central bank will raise interest rates (at least) two more times, but his acknowledgement that 'the disinflationary process has begun' has given traders more confidence that those will be the last two hikes of this cycle and that the Fed will be on hold midway through Q2," said Matthew Weller, global head of research at FOREX.com and City Index.

Markets have priced in another 25 bps hike at next month's policy meeting.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler and Andrea Ricci


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