Rate hikes begin, while heavy focus remains on Russia-Ukraine war
Summary
The first rate hike since 2018, likely to be followed by consecutive rate hikes throughout the year to combat rising prices, was in line with expectations. Markets reacted to the announcement and continue to be influenced by the growing crisis between Russia and Ukraine.
March FOMC meeting
The Federal Open Market Committee (FOMC) wrapped up their two-day meeting on Wednesday, announcing the first 25 bps rate hike since late 2018, which resulted in a new Federal Funds target rate of 0.25%–0.5%. The release of an updated Fed dot plot revealed expectations of six more rate hikes this year leading to a fund rate of 1.9% by the close of 2022. This suggests one hike per the remaining six meetings of the year. Additionally, there are three hikes anticipated in 2023. Chair Powell also indicated a reduction in the Fed’s nearly $9 trillion balance sheet starting in May — this could be the equivalent of another rate hike. Reactions are mixed; some see the projection of one hike per meeting as too hawkish while others believe the Fed is already somewhat behind on hiking rates.
The Fed also announced changes in their 2022 inflation (core PCE, excluding food and energy) and GDP estimates from December. Inflation estimates increased from 2.7% YOY to 4.1% YOY, and GDP estimates declined from 4.0% to 2.8%. This did not come as a surprise as tension around the Russia-Ukraine conflict continues to weigh on economic conditions. As a final note, Chair Powell addressed the elephant still in the room, citing reasons for inflation remaining elevated as a mixture of “supply and demand imbalances, higher energy prices, and broader price pressure.” However, he balanced the sentiment with a commitment to restore price stability and pointed to the strong job market as evidence the economy is well positioned to handle tighter monetary policy approaching.
Rates and FX markets react
Rates started the week high with the 10-year treasury rate reaching 2.14% on Monday as investors weighed implications of the Russia-Ukraine war and FOMC meeting expectations. Rates rose post meeting, especially in the shorter tenors. The 2-year treasury rate jumped during the day Wednesday up to 2.002%, and settled back to 1.957% by the end of the week. As we continue to see a steepening forward curve and lower rates at longer tenors, corporations could view hedging longer maturities as more attractive.
The dollar weakened mildly throughout the week on expectations of the FOMC meeting, contrasting the trend of dollar strength seen throughout the year. Given gold’s sensitivity to rising interest rates, the price of gold fell early in the week on rate hike expectations but began to steady towards the end of the week.
Oil prices moderating
Oil prices moderated off the highs seen in the previous week. Both the U.S. benchmark oil, WTI Crude, and the global benchmark, Brent Crude, dipped below $100 a barrel on Tuesday but rallied on Friday with WTI Crude closing out the week at $104.70/bbl and Brent Crude at $107.93/bbl. The Russia-Ukraine conflict continues to drive oil prices with the changing narrative around peace agreements and faint signals of progress surrounding the U.S. and Iran nuclear deal.
The week ahead
Markets continue to be influenced by the Russia-Ukraine war, reacting to each glimpse of hope that quickly changes to worry of stalled peace agreements. On Friday, the University of Michigan is set to release the final Consumer Sentiment Index for March; the preliminary result was set at 59.7.
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