Odds of a 50 bps hike on March 22 fall to 28%

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What would have to happen for the Federal Reserve to hike rates by 50 bps on March 22?

First, there would need to be a sublime resolution to the current bank run. That’s not impossible but it’s tough to imagine that the mood could switch so rapidly that the Fed wouldn’t feel bruised or feel that the episode didn’t put downward pressure on the economy.

Second, CPI would need to be high. How high? The consensus estimates on headline and core are both +0.4% and I’m guessing at least 0.6%.

Given that, the Fed funds futures market has dropped the implied probability of a 50 bps hike to 28% and that’s from +70% just two days ago. For me, that still sounds too high but you can see why the market would be reeling.

The point of moving in 25 bps, in Powell’s words, is so the Fed can ‘feel’ its way ahead. That’s generally via economic data but it’s also based on events like this that show where the risks lie.

A tougher question is what to do about the dot plot.

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