Econ 101 teaches us the stubborn thing about inflation is whether the catalyst is permanent or transitory, bad luck or bad policy, even temporary shocks can lead to permanent effects. Markets and policymakers alike downplayed this reality for many months, asserting inflation would return to acceptable levels on its own. Alas, inflation has continued to remain elevated, and, alarmingly, both market-based and survey-based inflation expectations have risen markedly. In response, central banks have adopted hawkish rhetoric and markets have begun to price in the reality of higher interest rates.

Markets expect the Fed to raise rates by 50 bps at tomorrow’s meeting. Just two months ago, on March 1, the fed funds futures market anticipated a funds rate of around 1.25 percent at the end of 2022. A mere eight weeks later, the implied policy rate at the end of 2022 stands at 2.75 percent, a full 150 bps higher.

In our previous Wholesale Funding Update, we cited New York Fed research that found a one percent increase in the fed funds rate has historically led to a four percent increase in wholesale funding over the next year. With the funds rate projected to rise an additional 2.5 percent this year, demand for wholesale funding is likely to rise materially.