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 3.75% – 4.00%. There were no dissents.

Committee Statement:

• Economic Assessment  

  • There were no changes to the economic assessment. Inflation remains elevated, the labor market is strong, and growth is modest.

• Outlook 

  • There were also no changes to the outlook which continues to reflect upside risk for inflation and downside for growth related to the war in Ukraine.

• Current Policy and Forward Guidance

  • The Committee anticipates ongoing hikes will be appropriate as well as continued rundown of the balance sheet.

  • The Committee changed the language on the appropriate path for the Fed Funds rate going forward by stating that they will continue to hike until policy is “sufficiently restrictive” enough to bring inflation back to 2% over time. They also wrote that in determining the pace of future hikes, the Committee will take until account cumulative tightening of policy which impacts the economy with a lag.

  • The FOMC remains “strongly committed” to returning inflation to target and “highly attentive” to inflation risks.

Chair’s Press Conference:

At the press conference, Chair Powell explained the rationale behind increasing the Fed Funds rate by 75 bps for a fourth consecutive meeting and offered some views on the path going forward.

• Rate Hikes/Forward Guidance :  The Fed anticipates ongoing rate hikes in order to reach sufficiently restrictive territory and view that restoring price stability will require staying restrictive for some time. They also recognize the effect of cumulative tightening, that policy operates with a lag, and at some point, that it will become appropriate to slow the pace of increases. However, there is still scope for ongoing rate hikes and there is significant uncertainty about how high they will need to go. The most recent data suggests it will be higher than they previously expected. Chair Powell was adamant that it is very premature to think about pausing, and the question of when to moderate is less important than the question of how high they will need to go and how long they will stay restrictive. From a risk management standpoint, the Fed believes it would be better to overtighten and subsequently adjust than to loosen too soon.

• Inflation : Chair Powell continues to reinforce the view that inflation is much too high, that they are attentive to upside risks, and that they want to get inflation back to 2%. While he did not explicitly reference a level for slowing/pausing rate hikes, he did mention a series of down monthly readings would be helpful. Furthermore, they will take into account financial conditions and real rates in determining when to pause.

• Labor market : The Chairman continues to view the labor market as extremely tight and out of balance with job demand exceeding supply and wage growth elevated. Going forward, they will look at wide range of data, which is currently mixed. Wages are no longer accelerating, but they are also still above a level consistent with 2% inflation.

Our View:

• High inflation and low unemployment will keep the Fed on track to bring policy rates well into restrictive territory despite downside risks to growth and rising recession risks at home and abroad.

• We believe the Fed will hike to at least 4.75% 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. Offsetting this upward pressure on yields from inflation and the Fed, rising recession risks, tighter financial conditions, and a slowing economy will cap how high long-end yields can rise and keep the yield curve inverted. We expect the 10-year yield to end Q1 2023 between 3.375% – 3.875%.

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