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Bespoke’s Quote of the Day: “Interest rates are like gravity on valuations. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on values.” – Warren Buffett
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Yesterday’s market sell-off coincided with expectations for an even tighter Fed. As fed fund futures priced in a higher likelihood of tighter policy over the next year, equity prices fell. Below is a chart showing the expected path for the Fed Funds Rate (lower bound) through the March 2023 meeting. Pricing is now suggesting a 50 basis point hike at the May meeting, a 75 basis point hike at the June meeting, and another 50 basis point hike at the July meeting. That would take the Fed Funds Rate up to 2-2.25% (remember, it’s at just 0.25-0.50% now) by mid-July. Talk about a tight summer!
After the estimated 175 basis points of tightening through July, markets are pricing in five more consecutive 25 basis point hikes through March 2023, which would leave the lower bound of the Fed Funds Rate at 3.25%.
If we do see a Fed Funds Rate of 3.25-3.50% by next March, it will be tied for the steepest one-year of tightening since 1989:
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