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 50 bps to a target range of 0.75% – 1.00%. The Committee also confirmed the start of the quantitative easing (QT) program beginning in June.

Committee Statement:

• Economic Assessment – The economic assessment continued to reflect a strong labor market. Inflation is well above their target of 2%.

• Outlook – The paragraph on economic uncertainty continues to focus on the invasion by Russia of Ukraine and the upside risk to inflation and downside risks to growth.

• Current Policy and Forward Guidance –
  • On the timing of future rate hikes, the Committee anticipates ongoing hikes will be appropriate. 
  • Balance sheet reduction will begin in June at a max runoff caps of USD 60 billion Treasury and USD 35 billion Agency mortgage-backed securities (MBS) per month. The ramp up to the maximum caps will occur in 2 months.

Chair’s Press Conference:

Chair Powell communicated that at the current levels of inflation and a strong labor market, the on-going rate increases would be appropriate as well as passive balance sheet run-off.

• Inflation: Chair Powell communicated the FOMC’s determination to control inflation. The Committee is attentive to upside inflation risks and resolute to taking action to avoid inflation becoming entrenched.

• Labor market: The Chairman believes the jobs market is unsustainably strong as reflected in the large excess of job openings relative to unemployed.

• Rate Hikes: Chair Powell expected on-going hikes would be appropriate and that the economy would be able to handle higher policy rates.

• Balance Sheet: The Chairman indicated that asset sales were not currently being considered but the Committee discussed selling Agency MBS at some point after QT was well underway.

Our View:

• Persistently above target inflation and a strong labor market will keep the Fed on track to reset policy rates materially higher this year despite downside risks to growth and elevated global uncertainty.

• We believe the Fed will hike rates by at least 25 bps at the next 6 meetings, bringing the policy rate to a minimum of 2 – 2.25% by YE2022. More likely, the Fed will utilize additional 50 bps rate hikes this summer to bring policy closer to neutral and even restrictive while the economy remains above-trend.

• U.S. Treasury yields have reset materially higher so far this year but should remain elevated as the Fed continues to remove policy accommodation against a backdrop of high inflation and still upside inflation risks. We expect the 10-year U.S. Treasury yield to trade in a range of 2.50%–3.00% in the near-term.

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