• Federal Reserve Chair Jerome Powell's stance on the current economy as "very different" than the last time the Fed hiked rates raised fears about a more aggressive hawkish cycle and a potential 50-basis point rate hike as soon as March.
• But several Fed presidents came out last week with a "go slow" message and one said a 50-basis point rate hike is not their initial preference.
• The risk of the Fed surprising the market with more aggressive action at some point in 2022 isn't going to be ruled out and stocks are likely to remain volatile.

A few weeks ago when Fed Chair Jerome Powell was asked at his post-FOMC meeting press conference whether a 50-basis point rate hike was on table, he did what a Fed chair is supposed to do: he wouldn't rule it out, and stuck to his more general talking points, which are more hawkish, about the economy being stronger than the last time the Fed began a tightening cycle.

"We fully appreciate that this is a different situation. If you look back to where we were in 2015 '16, '17, '18 when we were raising rates, inflation was very close to 2 percent, even below 2 percent. Unemployment was not at our estimates of natural rate. And growth was, you know, in the 2 to 3 percent range. Right now we have inflation running substantially above 2 percent and, you know, more persistently than we would like. We have growth -- even in forecasts, even in the somewhat reduced forecast for 2022, we still see growth higher than, substantially higher than what we estimate to be the potential growth rate. And we see a labor market where, by so many measures, it is historically tight. ... We haven't made -- to your specific question, we really have not addressed those questions. And we'll begin to address them as we move into the March meeting and meetings after that."

At least five times during his press conference, Powell made a statement about how different the economy is this time, and it was so much on his mind that his last reference to the strength of the economy was a reminder to his audience about how many times he had said something to that effect during the press conference.

Market history since World War II says when the Fed starts hiking, stock returns will be on average more modest, but not necessarily negative, and in the months ahead of a Fed rate hike, the stock market does well, with the greater pressure on stocks coming once the hikes actually begin. This year has not followed that script, with a terrible January, and even though last week the S&P 500 rebounded, it is still down more than 5% year-to-date and the Dow Jones Industrial Average down by roughly 3.5% as of Friday.

Fear of a 50-basis point Fed rate hike — alongside a Wall Street scurrying into more hawkishness itself, with Bank of America now predicting seven rate hikes this year — is one factor that has unsettled the market and introduced greater volatility for investors already prepared for a central bank at the end of an easing era. But has the fear of a 50-basis point rate hike in March ever been realistic?

The debate isn't only limited to the U.S. Last week, the Bank of England voted 5-4 to raise rates by 25 basis points in the fight against inflation — four members voted in favor of a 50-basis point increase.

The odds of a 50 basis point rate hike at the start of a new Fed tightening cycle have moved around quite a bit, roughly doubling in recent weeks before moving back down when several Fed presidents — including Fed officials known to be more hawkish and more attuned to inflation ahead of peers on the FOMC — spoke last week about moving gradually even if at the same time they ruled no policy move out prematurely.

"Ideally, you always want to go gradually," Kansas City Fed President Esther George told an audience at the Economic Club of Indiana.

"If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I'm going to lean into that . . . If moving in successive meetings makes sense, I'll be comfortable with that," Atlanta Fed President Raphael Bostic said in an interview with the FT a week ago.

A day later, Bostic told Yahoo Finance of a 50-basis point hike in March, "That's not my preferred setting [or] policy action for the next meeting."

The odds ticked higher again after the big jobs number on Friday which defied pessimistic expectations about omicron's impact on hiring, though the Fed has maintained throughout Covid waves that each one has proven to have less of an impact on the economy.

The recent rate hike history

Recent Fed history does suggest that if the Fed moves by 50 basis points it is not likely to be its first move in a hiking cycle. A May 2000 increase of 50 basis points came after five bumps of 25 basis points from June 1999 to March 2000, and was the last rate increase of the cycle.

The 50 and 75 basis point moves in 1994 – 1995 (May, August, November, February) came after three bumps of 25 basis points (February, March, and April 1994). As is in the 1999 – 2000 rate hike cycle, these larger moves marked the end of monetary policy tightening, according to a review of the moves by DataTrek Research.

"History says the Fed leaves 50 basis point moves (or greater) for the middle to end of a tightening cycle, but remember that Chair Powell has explicitly said the current environment is different from the past," DataTrek Research's Colas wrote in a recent analysis. "Futures are putting low odds on a March 50 bp hike but that could easily change if incoming data shows inflation is still accelerating."

For John Ryding, chief economic advisor at Brean Capital, there is a disconnect between the logical case for a 50-basis point hike and actual understanding of how this Fed acts, starting with the principal that the sooner the Fed acts, and the more aggressively it acts in the short run, the less they have to do in the long run.

This idea was once an established principal of the central bank, which past Fed vice chairman Alan Blinder called "the stitch in time" philosophy.

In the 1990s, Blinder warned that the Fed needed to act in anticipation of economic conditions rather than use the Bunker Hill "wait until you see the whites of their eyes" approach, which is a recipe for failure. "By the time you see the whites of their eyes, they've already shot you right through the heart. ... You try to save nine by stitching in time," Blinder said in a 1995 speech.

But to Ryding's mind, if the Fed were more serious about trying to get ahead of inflation than the market already expected, it would have raised rates already.

Not only did the Fed pass up the opportunity to raise rates in January, which was expected — but which a majority of respondents to CNBC's Fed Survey thought would have been the right move to make given how far behind the Fed is on inflation — but the Fed is still buying bonds in February, "$30 billion worth," Ryding noted, "even with all it already knows about the economic situation. If it still isn't willing to say that it is time to stop adding to the balance sheet, that doesn't sound to me like a Fed ready to raise by 50 basis points," he said.

Did the stock market get too hawkish?

The volatility in stocks, and the big rebound last week led by strong earnings in some of the largest technology companies, may be a reflection that Wall Street potentially went too far to other side of the Fed monetary policy spectrum, too hawkish — led by the Bank of America call for seven rate hikes — and causing too much near-term bearishness in the stock market. There was good reason for a market overreaction to the Fed's own hawkishness. It was only last September that the FOMC anticipated no rate hikes in 2022. By December, only one member thought there would not be a rate hike and the median was three. Changes are occurring swiftly.

Powell's non-answer on a 50-basis point rate hike, meanwhile, doesn't say anything more than that the process has to play out among Fed members. "Powell can't say, 'No, we will not do 50 basis points unless you know every members is of that mind. It's very difficult. So he has to respect the process," Ryding said.

But the fact that several top Fed officials seemed to downplay a 50-basis point hike last week isn't necessarily a strong signal, let alone commentary Ryding would define as "walking back," at all.

The Fed prepares markets for bad news, and at this point the market is already prepared for the idea that the central bank is leaning into the idea of doing more rather than less to tame inflation. The bank also would never rule out any specific policy move ahead of time, and remains data-dependent. And if it were to end up doing less, that is not a change it would feel the need to prepare the market for in advance.

"When it comes to market participants catching up, they have a tendency to run from one side of the boat to other and that takes the market with it, and that's something of what we saw. ... I will guarantee you, if there is any chance of the Fed doing 50 basis points, we will all be in no doubt about it," Ryding said.

The Fed has other options, too. The financial market has too much cash that it doesn't know what to do with and has been giving back to the Fed in the reverse repo market, and $1.5 trillion in bank reserves more than the banks need. All this liquidity has to be soaked up, and lots of adjustment on the balance sheet are yet to be made, and that balance sheet unwind won't occur at the "glacial" pace it did last time.

"That won't be case this time," Ryding said, which the Fed has made clear is its position though details remain scant.

The DNA of this Fed

The market's shifting view on a 50 basis point hike in March may continue to move around, but being too bearish in the short-term doesn't mean the market is not underestimating the degree of monetary restraint that will eventually be needed to rein in inflation.

Even if the Fed is of the mind to stick with a 25-basis point hike in March, it will come back in May with a much better idea of where the economy is and have the option to pursue a 50-basis point hike at that point if warranted. Ryding says based on everything we have seen and heard from the Fed to date, it is much more likely that if they are inclined to go above 25 basis points at any point, it isn't before May.

"50 is just I think out of character for this Fed, and they have additional strategies," Ryding said. "I don't think the adjustment is about doing more than expected at the March meeting. It's fleshing out the skeletal details we have on the balance sheet."

Ryding's forecast is four rate hikes this year — and if he had to choose between three and five, he would lean to five based on his inflation forecast. And eventually, he does think the Fed becomes more hawkish, just not yet.

"To come out of the blocks with a 50-basis point rate hike is not in this Fed's DNA," he said. And until there is more recognition of the upside risk to inflation as becoming reality in the Fed forecast — not the "base case," Powell said after the last FOMC meeting, but with the Fed chair nevertheless describing the risk as tilted to the upside — policy won't get tighter than expected. "Eventually, I do think the Fed will have to do more than the market expects, but not in the near term," Ryding said.

When the VIX hit 40 before last week's stock market rebound, it was a sign of stocks being oversold, but that volatility will remain a feature of the market. "Volatility has to be a theme because we've been spoon Fed for many, many years, for the best part of the past decade, we've never been surprised, and the Fed has moved very gradually, but now it doesn't know what it will do."

It's either more now or later for Powell

A 50-basis point hike in March may be too soon for this Fed, but it remains the view of economic forecaster Joel Naroff that unless the inflation numbers decline sharply, the Fed will have to get more aggressive than expected at some point. With businesses having pricing power for the first time in decades, they are not likely to give it up easily, which increases the potential for a significant misreading on inflation. "If CPI and other inflation readings stay at the current level, the Fed would be responsible if they started signaling we will be on top of this and the simplest way is by going 50 basis points, whether in March or June," he says.

To his mind, if the Fed follows through on the expectation of a 25-basis point hike in March, it only means that there is a higher probability that the 50-basis point rate hike comes later. "I've been thinking they need to do more than simply say the economy is different and we have a strong economy," Naroff said, referencing Fed Chair Powell's recent post-FOMC comments that were interpreted as broadly more hawkish. "He has provided the ability for the members who want to do more than 25 basis points to come out," he said.

Naroff thinks the 50-basis move is the right one to more quickly correct the mistakes made by the Fed during the "transitory" inflation period. "They could dispel all of the questions by simply going 50 basis points," he said.

In fact, if the Fed moved quicker and sooner, they might be able to do a lower number of total rate hikes.

"Everyone has the belief they have to go each quarter, but I'm hoping the Fed at some point does something that is classified as off-meeting," Naroff said. "Powell said there is plenty of room to move and not the hurt economy, so why take three years to get to 3% when we have a strong economy and inflation? That should be a message the market should have received a long time ago," he said.

To his mind, whether the Fed does 100 basis points or 125 basis points of hikes this year, and whether in 25-basis point increments or more, is largely irrelevant. "The point is that this is not the end. And he [Powell] made that pretty clear," Naroff said. "I just think 50 basis points is a stronger statement."

Last Friday's jobs number reinforces the view that the next inflation number or two may push the Fed into more of a hawkish corner, but the latest Fed presidents' comments do show that they seem to be more unified in a "go slowly" posture, for now. But after that first move, "all the bets do come off and they can go in any direction they want," Naroff said.

The bottom line is more volatility, as Grant Thornton chief economic Diane Swonk concluded after the FOMC meeting, and whether up or down, stocks have remained volatile in trading since then.

"The Fed has completed its pivot from being patient to panicked on inflation; its next move will be to raise rates. Soon after, it will be looking to reduce its massive balance sheet to amplify shifts in short-term rates and ease the transition for the broader economy. That sounds nice in theory but it has never actually been done. Making matters worse will be how heated the debate within the Fed gets as the FOMC decides how best to calibrate tightening. Brace yourselves for dissents and the dissonance that creates for financial markets in the year ahead," Swonk wrote.