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 tightening (QT) program beginning on June 1^st and ramping up to a maximum $95bn/month after three months.

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. It also referenced the covid-related lockdowns in China as exacerbating supply chain disruptions. As a result, the committee is “highly attentive to inflation risks.”

• Current Policy and Forward Guidance – On the timing of future rate hikes, the Committee anticipates ongoing hikes will be appropriate. 

Chair’s Press Conference:

At the press conference, Chair Powell communicated that at the current levels of inflation and a strong labor market, the Chair viewed that on-going rate increases and balance sheet runoff would be appropriate.

• Inflation: Chair Powell opened his press conference by directly addressing the American people and highlighting that inflation is much too high. The Committee is attentive to upside inflation risks and resolute in taking action to avoid inflation becoming entrenched. 

• Labor market: The Chairman believes the jobs market is “extremely tight” as reflected by the large excess of job openings relative to unemployed.

• Rate Hikes: Chair Powell specifically stated that “75 bps is not something the FOMC is actively considering.” However, he did state that 50 bp hikes are on the table at the next 2 meetings, that they are a long way from neutral, and that they would move expeditiously.  

• Balance Sheet: The Chairman indicated that balance sheet caps would be $30bn and $17.5bn per month for treasuries and MBS respectively for 3 months, before doubling to $60bn and $35bn for MBS thereafter. There was no reference to outright MBS sales, though he did state that at the current levels of mortgage rates, MBS runoff pace would be less than the cap amount. 

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 look to get to 2 - 2.5% at a pace that is faster than previous tightening cycles before reassessing the fundamental backdrop. 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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