Traders cut expectations for Fed rate hikes in 2022 as economy contracts more than expected in first quarter

Fed funds futures traders are backtracking on their outlook for further rate hikes as revised data released Thursday shows the U.S. economy contracted at an annual pace 1.5% bigger than expected .

After the data was released Thursday morning, traders placed a 60% chance that the fed funds rate target would be between 2.5% and 2.75% by December, up from 35% a week ago. , according to FedWatch CME Tool. The likelihood of policymakers hitting a target between 2.75% and 3% by the end of the year, from a current level between 0.75% and 1%, has fallen to 27% from 51 % on May 19.

The drop in first-quarter GDP was accompanied by the first decline in corporate profits in five quarters – which analysts saw as a sign that the economic contraction was more real than initially thought after being attributed to a record trade deficit.

Investors have focused on how much tightening the Federal Reserve will need to tighten to bring inflation down to its highest level in four decades, while wondering if they will be forced to scale back their efforts due to a possible economic downturn. Major US Stock Indices
SPX,
+1.82%

COMP,
+2.28%
were up in morning trading, with Dow DJIA industrials,
+1.55%
up more than 400 points amid lower Fed rate expectations. Meanwhile, most Treasury yields were lower as growth concerns weighed on the bond market, with the 10-year rate TMUBMUSD10Y,
2.776%
less than 2.75%.

Minutes of the May 3-4 central bank meeting, released on Wednesday, showed most policymakers believed that 50 basis point rate hikes would likely be appropriate at the next two meetings. Additionally, a number of participants suggested that pricing pressures “may not be getting any worse.”

The minutes “went back and forth without much fanfare, and did not breathe much life into the afternoon markets” on Wednesday “or the debate over the near-term course of policy,” a team from Deutsche Bank DB,
+1.41%
said in a note Thursday.

“With the minutes falling short of hawkish fears and mounting worries about a potential recession, investors continued to reduce the likelihood of more aggressive tightening,” the Deutsche research analyst wrote on Thursday. Bank Henry Allen and others. “We have already hiked nearly 25 basis points, which is the biggest reversal in monetary policy expectations this year since Russia began its invasion of Ukraine.”