(Bloomberg) -- The market for wagers on the Federal Reserve’s policy rate priced in a peak of 5%, the highest yet, for the first half of 2023.
The rates on the March and May 2023 overnight index swap contracts hovered around 5% after rising as high as 5.02% and 5.03% respectively in early European trading hours. They were below 4.70% as recently as Oct. 13, before a report showing that US consumer prices rose in September more than estimated.
“This is a kind of milestone,” former US Treasury Secretary Lawrence Summers said on Twitter. The market-implied terminal rate is “more likely than not to rise more,” although its 400-basis-point climb over 18 months “is surely most of the increase we will see in this cycle.”
The Fed has raised its policy rate five times since March, most recently to a range of 3%-3.25% in September, after dropping the lower bound to 0% in 2020 at the onset of the pandemic.
A fourth three-quarter-point increase was priced into the contract corresponding to the next meeting on Nov. 2 after the September inflation data, and another move of that size is almost fully priced in for the year’s final meeting in December.
The policy rate was last raised to 5% in 2006.
(Adds Summers comment, updates rate levels.)
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