FOMC: accelerating rate hikes
Hedging and Capital Markets
Real Estate | Kennett Square, PA
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.
- 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.
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.
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 Chatham Rates or contact us using the form below.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0127
Our featured insights
ECB hikes 25 bps while BoE keeps rates steady
The Bank of England (BoE) announced it would keep rates on hold at today's meeting, following 14 consecutive rate hikes that have taken borrowing costs to 5.25%, the highest level since 2007. A 25-basis-point rate hike was expected at the start of the week, but the release of August inflation...
BoE hikes 25 bps and warns more to come, while ECB cools on a September hike
The Bank of England (BoE) raised borrowing costs by 25 basis points at their meeting today, a smaller hike than their June meeting following better-than-expected data. However, two policymakers voted for a 50-basis-point increase. The BoE's statement warned that some of the upside inflation risks...
FOMC increases rates by 25 bps to 525–550 bps range, reflecting 22-year high
On Wednesday, July 26, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate to a target range of 5.25%–5.50%. Following a pause in rate hikes at the prior meeting, this increase elevates the fed funds target to its highest level since 2001 and was...
ECB holds course but BoE in trouble
The European Central Bank (ECB) continued its path of rate rises at the latest meeting, surprising no one with a hike of 25 basis points taking its deposit rate to 3.50%, the highest level in 22 years. The Governing Council is making every effort to reduce inflation to their 2.00% target after...
Fed holds rates: Powell pauses
On Wednesday, June 14, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.00% - 5.25%. The FOMC statement continued to reference economic expansion and a robust labor market. In a departure from the last statement, the FOMC cited...
No surprises as inflation persists
The European Central Bank (ECB) increased its main deposit rate by 25 basis points to 3.25%, but signaled that it would slow down the pace of its monetary policy tightening in light of weak economic growth and banks tightening credit access. The Bank of England (BoE) similarly increased its base...
Fed hikes 25 bps, signals possible rate pauses
On Wednesday, May 3, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate by 25 basis points to a target range of 5.00% - 5.25%. The FOMC noted that ongoing economic developments will determine if additional hikes are necessary.