Where is the ceiling for Fed and ECB rate hikes?

Throughout 2022, both the FED and the ECB were forced to raise interest rates to combat inflation, putting interest rates at 4.75% and 3% respectively. For many months, these measures helped to cool the economy and it seemed that the ceiling for rate hikes was close. However, a new spike in inflation has set off alarm bells in the markets.

In the US, the PCE (the Fed’s favorite inflation measure) has risen in January compared to last month, and the US labor market continues to surprise with its strength. On the other hand, Europe seems to be entering the same dynamic as February CPI in Germany, France and Spain was worse than the market expected, coupled with more resilient economic activity than expected.

Given this situation, markets are taking the opportunity to modify their interest rate ceiling predictions. Regarding the Fed, the market is forecasting another 25-basis point hike, placing the ceiling between 5.25%-5.50%. On the other hand, Lagarde has almost confirmed already that the ECB will hike again in March by another 50-basis points, and the market projects the ceiling at around 3.85%.

Although the US and Europe are surprisingly resilient, these continued interest rate hikes can be very damaging to both economies, as long-lasting Hawkish policies can lead to a deep recession.

Source: Investing