{"id":189782,"date":"2023-05-03T12:36:47","date_gmt":"2023-05-03T16:36:47","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=189782"},"modified":"2023-05-03T13:14:40","modified_gmt":"2023-05-03T17:14:40","slug":"what-to-expect-when-youre-expecting-the-fed-may-2023-edition","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/what-to-expect-when-youre-expecting-the-fed-may-2023-edition\/","title":{"rendered":"What to Expect When You\u2019re Expecting the Fed \u2013 May 2023 Edition"},"content":{"rendered":"\n<p>This afternoon we hope to learn quite a bit about the state of interest rates with the FOMC rate announcement and Chairman Powell\u2019s press conference.&nbsp; The rate decision itself seems to have a broad consensus, with Fed Funds futures indicating a 90% likelihood of a 25-basis point hike.&nbsp; We will need to glean the more important clues about the future direction of rates from the FOMC statement and the Chair\u2019s commentary.&nbsp; The options market seems to expect good things to follow.<\/p>\n\n\n\n<p>The key question on everyone\u2019s mind is whether today\u2019s hike will be the last, and whether there is a reasonable likelihood for cuts in the coming months.&nbsp; It seems reasonable to think that the former is true.&nbsp; We\u2019ve seen rates rise dramatically in a short period of time, and it is undeniable that the recent banking woes are a direct consequence of that activity.&nbsp; The FOMC must be cognizant of this, and it is hard to imagine that they will be eager to add to those concerns.<\/p>\n\n\n\n<p>As for cuts, however, that might be a different matter.&nbsp; <a href=\"\/campus\/traders-insight\/securities\/macro\/calm-markets-and-cognitive-dissonance\/\">On March 27<sup>th<\/sup> we wrote<\/a>:<\/p>\n\n\n\n<p><em>\u201cDo you reasonably expect the FOMC to say, \u201cSure, we\u2019ve whipped inflation, so let\u2019s start cutting rates.\u201d?&nbsp; Of course not.\u201d<\/em><\/p>\n\n\n\n<p>In a speech delivered on April 11<sup>th<\/sup>, Philadelphia Fed President <a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2023-04-11\/fed-s-harker-is-prepared-to-do-more-if-needed-to-curb-inflation?sref=UQoV8r0O\">Harker is quoted<\/a> as saying:<\/p>\n\n\n\n<p><em>\u201cBut at this point, I don\u2019t see why we would just continue to go up, up, up and then go, whoops! And then go down, down, down very quickly. Let\u2019s sit there.\u201d<\/em><\/p>\n\n\n\n<p>Harker is a voting member of the FOMC, and given the recent consensus, it seems reasonable to assume that his comments are not completely at odds with the rest of the committee.&nbsp; Much of the rhetoric from Fed talking heads has been about continuing to fight inflation and pushing back on the notion that rate cuts are imminent.&nbsp; The logical assumption would be that the Chair will reinforce the notion that even if we are at the end of the current hiking cycle, rates will remain at current levels for some time\u2026<\/p>\n\n\n\n<p>Unless, of course, circumstances dictate a change in policy.&nbsp; Think about what those circumstances might be.&nbsp; Are they likely to be a positive for equity valuations?&nbsp; Probably not!<\/p>\n\n\n\n<p>On the other hand, Powell could trot out his familiar \u201c<a href=\"\/campus\/traders-insight\/securities\/macro\/goldilocks-is-a-68-year-old-man-in-a-suit\/\">Goldilocks in a Suit<\/a>\u201d persona, and all will be perceived as rosy.&nbsp; <a href=\"\/campus\/traders-insight\/region\/disinflation-is-the-new-neutral\/\">Disinflation, anyone<\/a>?<\/p>\n\n\n\n<p>One thing we already know for sure is that today\u2019s hike will get us very close to the peak rates seen in 2006-2007.&nbsp; In that cycle, we saw the Fed Funds rate rise from 1% to 5.25% over the course of just over two years and the Fed kept that peak rate for a full year.&nbsp; Unfortunately, we now know how that ended \u2013 with a global financial crisis.&nbsp; For some perspective, if expectations hold, the current cycle will show rates rising from 0% to a midpoint of 5.12% in just over a year.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Effective Fed Funds Rates, 25 Years Monthly Data<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"442\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture4-1.png\" alt=\"Effective Fed Funds Rates, 25 Years Monthly Data\" class=\"wp-image-189787 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture4-1.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture4-1-700x331.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture4-1-300x142.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture4-1-768x363.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/442;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>Notice that over the past 25 years there is no precedent for a rate cut quickly following a hiking cycle.&nbsp; The 2000 and 2019 hikes persisted for at least 6 months.&nbsp; Yet Fed Funds futures anticipate a cut as early as July.&nbsp; Again, ask yourself what might bring that about?<\/p>\n\n\n\n<p>As for the options market, we see that short-dated options on the S&amp;P 500 Index (SPX) are anticipating a bounce after the results.&nbsp; Looking at options expiring tomorrow, the IBKR Probability Lab shows a peak probability in the 4140-4145 range, while options expiring Friday show a peak in the 4150-4155 range:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-ibkr-probability-lab-for-spx-options-expiring-may-4th\"><strong><em>IBKR Probability Lab for SPX Options Expiring May 4th<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"382\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-1.png\" alt=\"IBKR Probability Lab for SPX Options Expiring May 4th\" class=\"wp-image-189786 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-1.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-1-700x286.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-1-300x122.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-1-768x313.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/382;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>IBKR Probability Lab for SPX Options Expiring May 5<sup>th<\/sup><\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"382\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture2-4.png\" alt=\"IBKR Probability Lab for SPX Options Expiring May 5th\" class=\"wp-image-189785 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture2-4.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture2-4-700x286.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture2-4-300x122.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture2-4-768x313.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/382;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>Meanwhile, VIX is off its recent lows, but still hardly showing any strong demand for volatility protection:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>VIX, 2 Weeks, 10-Minute Bars<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"584\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6-1100x584.png\" alt=\"VIX, 2 Weeks, 10-Minute Bars\" class=\"wp-image-189784 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6-1100x584.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6-700x372.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6-300x159.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6-768x408.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture1-6.png 1430w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/584;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>Bottom line, we\u2019ll know soon enough whose predictions, if any, will be correct.&nbsp; Buckle up.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This afternoon we hope to learn quite a bit about the state of interest rates with the FOMC rate announcement and Chairman Powell\u2019s press conference. The options market expects good things to follow.<\/p>\n","protected":false},"author":4,"featured_media":181906,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,18,6,8,9,26,3],"tags":[9362,77,12620,207,317],"contributors-categories":[13576],"class_list":{"0":"post-189782","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-macro","9":"category-north-america","10":"category-region","11":"category-securities","12":"category-text-articles","13":"category-traders-insight","14":"tag-economic-outlook","15":"tag-fed","16":"tag-fed-chair-powell","17":"tag-spx","18":"tag-vix","19":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What to Expect When You\u2019re Expecting the Fed \u2013 May 2023 Edition<\/title>\n<meta name=\"description\" content=\"This afternoon we hope to learn quite a bit about the state of interest rates with the FOMC rate announcement and Chairman Powell\u2019s press conference....\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/189782\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What to Expect When You\u2019re Expecting the Fed \u2013 May 2023 Edition | IBKR Campus US\" \/>\n<meta property=\"og:description\" content=\"This afternoon we hope to learn quite a bit about the state of interest rates with the FOMC rate announcement and Chairman Powell\u2019s press conference. 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