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According to the CME Fed Watch Tool, which calculates the odds of a Fed move in interest rates by looking at prices in the Fed Funds Futures market, the odds of a 75 basis point interest rate increase by the Federal Reserve at its September 21 meeting have climbed to 90%. The odds were 87% yesterday and just 68% a month ago on August 9.

And what does the market expect after that? 50 basis points higher at the November 2 meeting (83% odds) and 66.5% odds that interest rates will finish the year at 3.75 to 4.00% after the December 14 meeting.

After that though, the picture gets murky. And that murkiness is the reason, in my opinion, for another Bear market rally to end 2022.

From CME numbers it looks like investors and traders are expecting the Fed to step to the sidelines very quickly.

The CME Fed Watch odds point to either interest rates starting at the end of the year at 3.75% to 4.00% level at the February 1 meeting (48.2%) or moving a modest 25 basis points higher to 4.00 to 4.25%. Those two positions account for combined odds of 86.3%.

At the March 31 meeting, the Fed Watch odds are 40.3% for 3.75% to 4.00%, in other words, flat with December, or 4.00% to 4.25%, only 25 basis points above the benchmark rate at the end of 2022 and steady if the Fed raises interest rates 25 basis points in February.

Only a very small 13.4% of sentiment is in favor of an interest rate increase to a benchmark of 4.25% to 4.50% at the March 31 meeting.

At this point, then, while investors are willing to concede that the Fed is serious about raising its benchmark interest rate to 3.75% to 4.00 by the end of 2022, they remain convinced that 4% will be the top for this interest rate cycle.

Which to my mind points both to a Bear market rally to end 2022 and a resumption of the Bear market in 2023 on disappointment when the Fed doesn’t decide inflation is under control and continues to raise interest rates.