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Market Update

FOMC: accelerating rate hikes

Date:
May 5, 2022
  • Christian Stahl headshot

    Authors

    Christian Stahl

    Hedging and Capital Markets

    Real Estate | Kennett Square, PA

Summary

On Wednesday, May 4, the Federal Reserve Board voted unanimously to raise the Federal Funds rate by 50 basis points to 0.75 – 1.00. This is the first time since 2000 that the Federal Reserve Board has raised rates by 50 basis points. They also outlined their balance sheet runoff plan which is set to start on June 1, 2022. The Federal Reserve made these decisions to help battle inflation concerns while aiming to bring the inflation rate back to 2%. There are multiple upward pressures on inflation and the Federal Reserve Board is using the tools at their disposal to battle those pressures.

Key takeaways

  • The Federal Reserve raised rates by 50 basis points for a target range of 75 – 100 bps.
  • This is the first time since 2000 that the FOMC raised rates by half a percent.
  • Along with rate hikes, the Fed is simultaneously reducing its balance sheet holdings starting June 1, 2022.
  • The Federal Reserve Board remains highly attentive to inflation.
  • The market is currently pricing in a 90.4% probability of another 50 basis point rate hike at the June 15 FOMC meeting.

FOMC recap

Yesterday, the Federal Reserve Board decided to fight inflation using two simultaneous strategies. First, the anticipated 50 basis point hike in the Federal Funds Target Range. This is the second consecutive rate hike this cycle and the first 50 basis point rate increase since 2000. We now have a target rate of 75 – 100 basis points with the Federal Reserve Board expecting more rate hikes this year. The second battle against inflation is reducing the Fed’s balance sheet. Along with the press release, the Federal Reserve Board published their plans for reducing the size of the Federal Reserve’s balance sheet. Starting June 1, 2022, the Federal Reserve will begin to allow balance sheet runoff at a maximum of $47.5 billion per month and three months later, will increase that maximum to $95 billion per month. This runoff will be mixed between Treasury coupons and mortgage-backed securities. Chairman Jerome Powell noted that they believe the runoff will be slower than the maximum will allow due to higher mortgage rates leading to less refinances of mortgage-backed securities. They will continually monitor the balance sheet runoff and will remain nimble to change their plan with any new economic data. The board is planning to lower the balance sheet to a level they determine to be a comfortable reserve.

Uncontrollable inflation pressures

The Federal Reserve Board stated that the Russian-Ukraine war has created additional upward pressure on U.S. inflation. The war compounded with COVID-19 related lockdowns in China may increase supply chain disruptions. The Board is “highly attentive to inflation risks,” and believes that ongoing rate hikes will be appropriate. Though Powell stated that the board is not actively considering 75 basis point rate hikes, they do believe that consecutive rate increases of 50 basis points may be appropriate. Powell stated that they are willing to take the Effective Federal Funds Rate to “restrictive territory” to control inflation. As the graph below shows, the market has increased expectations significantly for rate hikes in the near term since the March 16 Fed meeting. We still have an inversion in the yield curve around the 1.5 year mark showing the market’s expectations that the Federal Reserve will reverse monetary policy. This is caused by the Fed’s hawkish approach to rate hikes with many market participants believing the Fed will over adjust.

FOMC-1-month-Term-SOFR-April-4

Going forward

The Board will continue to closely follow economic developments to measure the market's reaction to the decisions made in the fight against inflation. Chairman Powell stated that the Board will remain nimble and will react to optimize the balance between fighting inflation and keeping a strong labor market. He stated that the board is open to multiple 50 basis point rate hikes at the next few meetings – even if that means going into restrictive territory. The market is currently pricing in a 90.4% probability of a 50-basis point hike at the June meeting and a 9.6% probability of a 75-basis point hike. To follow the developments of the market’s expectations of the forward interest rates visit ChathamRates or contact us using the form below.

About the author


Disclaimers

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