Traders now see Fed policy rate hitting 5% next year

BY Reuters | ECONOMIC | 12/02/22 09:02 AM EST

(Reuters) -The Federal Reserve is seen driving its policy rate above 5% by May after a government report Friday showed little sign of a cooling job market, despite the central bank's aggressive interest-rate increases so far.

After the Labor Department report, which showed U.S. employers added more jobs than expected in November, futures contracts tied to the Fed policy rate still implied a 70% chance that central bankers will slow the pace of rate hikes when they meet Dec. 13-14, rather than adding to a string of 75-basis-point rate hikes over the past four meetings.

But traders also piled into bets the Fed will continue to raise rates next year to slow the economy and demand for goods, services, and labor.

Fed Chair Jerome Powell earlier this week said the job market was so great it was "too great" for what is needed to allow price pressures to ease.

The Fed is now seen raising its policy rate, currently in the 3.75%-4% range, to 4.92% by March of next year and more likely than not into the 5%-5.25% range by May, based on futures contract prices and the CME Fedwatch tool.

Before the report, the rate was seen topping out at 4.75%-5% before the report.

(Reporting by Ann Saphir; Editing by Alexander Smith)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.