In its recently released minutes from its May meeting, the Federal Reserve indicated that it may need to raise its benchmark overnight lending rate, the federal funds rate, potentially even more aggressively than the market had anticipated. Rising rates increase the cost of debt for consumers, whether it’s for a mortgage, a credit card, or another type of consumer loan. Rising bond yields, which tend to move with the federal funds rate, could also continue to create volatility in the stock market, which is why investors pay such close attention to how the Fed moves the federal funds rate.
The Fed’s recent meeting minutes have investors wondering just how much it will raise rates this year. Luckily, JPMorgan Chase (JPM -0.70%) just dropped a big hint at its recent investor day about where the federal funds rate could land at the end the year. Let’s take a look.
So far, the Fed has raised the federal funds rate to a range of 0.75% and 1%, which has included a 25-basis-point hike (0.25%) at its March meeting and then the big half-point move earlier this month. Not too long ago, many experts might have said that this is the range where the federal funds rate would end the year. But inflation has been much more aggressive than the Fed seems to have anticipated, and now the agency looks to be playing catch-up with every intent of getting consumer prices back under control.
Prior to the release of the Fed’s meeting minutes, the market anticipated that the federal funds rate would end 2022 inside a range of 2.5% to 2.75%. Baked into this estimate is the Fed raising rates by a half-point at both of its meetings in June and July. But now the market seems to think it may have been too conservative with those estimates.
In its meeting minutes, the Fed stated that “most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” The Fed added that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
JPMorgan Chase held its annual investor day earlier this week, during which the bank raised its outlook for net interest income (NII), which is a key source of revenue for banks. Baked into JPMorgan’s assumptions is the upper bound of the federal funds rate reaching 3% by the end of the year, meaning the range would be between 2.75% and 3%, higher than the broader market’s prior assumptions.
The Fed has five remaining meetings left in June, July, September, November, and December. That means to get to a range of 2.75% to 3%, the Fed would need to do half-point hikes in three of its remaining meetings and then 25-basis-point hikes at the other two. If you had asked a lot of intelligent investors at the end of 2021 if the Fed would do four half-point hikes this year, I think a lot of them would have answered with a decisive “No.”
Banks are conservative
Banks are not all-knowing and have missed their fair share of financial estimates and guidance over the years. However, banks have the pulse of the economy because they serve so many different businesses across various sectors and so many different consumer segments. As the largest bank in the U.S., JPMorgan Chase has arguably the most comprehensive view of the economy. Furthermore, banks are conservative. If they are providing financial guidance like JPMorgan Chase just did, they know they are now under a microscope. That’s why JPMorgan saying the federal funds rate will end the year with the upper bound of the range at 3% means management could actually be thinking higher if they’re being conservative.