Fed ‘unlikely’ to hike by 50 basis points in March – Citi

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Citi strategists told the broker’s clients that the Federal Reserves are unlikely to hike by 50 basis points later this month. Instead, the Fed is likely to increase its benchmark interest rate by 25 bps.

“If core CPI accelerates further to +0.5%MoM and job growth prints +300k in February, markets could push the Fed to deliver a larger hike. Our base case remains to wait until further into the hiking cycle before receiving rates,” the strategists noted in a memo sent to clients.

The probability of a 50-bp hike at the March FOMC meeting has increased recently, although the market consensus still sees the Fed hiking by 25 bps next week.

“If the Fed accelerates, we will likely see the dollar strengthen into the accelerated hike and equities trade weaker post-hike. Rates trade surprisingly well after the acceleration. However, in two occasions the acceleration marked the end of the hiking cycle, which is unlikely this time around, but not impossible,” they added.

The market now expects the Fed to continue hiking by September 2023. If the Fed decides to accelerate, this is likely to push dollar and yields higher while equities will trade in the opposite direction.