Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group

The Federal Open Market Committee (FOMC) voted to raise the Fed Funds rate by 75 bps to a target range of 2.25% – 2.50%.

Committee Statement:

• Economic Assessment  

  • The assessment was brief but acknowledged that recent indicators of growth have softened, while the labor market remains strong.

• Outlook 

  • The outlook continues to reflect upside impacts to inflation and downside impacts to growth related to the war in Ukraine; however, the reference to COVID related lockdowns in China was removed.

• Current Policy and Forward Guidance

  • On the timing of future rate hikes, the Committee anticipates ongoing hikes will be appropriate as well as continued rundown of the balance sheet

  • The Committee is “strongly committed” to returning inflation to target.

Chair’s Press Conference:

• Inflation: Chair Powell continues to reinforce the view that inflation is much too high, that they are attentive to risks, and that they want to get inflation back to 2%. They will be looking at both headline and core inflation.

• Labor market: The Chairman continues to view the jobs market as very strong, pointing to the fact that 2.7 million people were hired in the first half of the year. While it may be beginning to slow, it is slowing from very robust levels.

• Rate Hikes: Chair Powell indicated that 75bps is unusually large, but could be appropriate at the September meeting depending on the data.

• Forward guidance: Chair Powell stated that the Committee would no longer offer clear forward guidance, differing from its approach on the way to neutral.

• Economic outlook: Chair Powell stated that the future policy path would depend on incoming inflation and labor data as well as the “evolving outlook for the economy.” While guidance was vague, the knee-jerk reaction from the market was to interpret this dovishly as it could be construed as a more forward looking approach.

• Recession: Chair Powell does not believe the US economy is currently in a recession, pointing to many areas of the economy that are performing well, particularly the labor market.

• Balance Sheet: The balance sheet runoff would continue at caps of USD30bn and USD17.5bn per month for U.S. Treasuries and MBS, respectively, before doubling to $60bn and $35bn for MBS starting in September.

Our View:

• Persistently above target inflation and a low unemployment rate will keep the Fed on track to bring policy rates into restrictive territory later this year despite downside risks to growth and elevated global uncertainty.

• We believe the Fed will hike at least 100bps more over the coming meetings before reassessing the fundamental backdrop; risks are skewed to the upside if inflation does not fall in line with market expectations.

• U.S. Treasury yields have reset substantially higher this year but should remain elevated as the Fed continues to remove policy accommodation against a backdrop of high inflation. We expect the 10-year yield to end 2022 between 2.75%–3.25% as recession risks rise associated with tighter financial conditions and a slowing economy.

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