Fed Watch: First half-point hike in 22 years priced in

The US Federal Reserve building in Washington DC

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Here’s what to know about Wednesday’s Federal Reserve interest rate decision.

The FOMC’s announcement arrives at 2:00 pm ET and Fed Chairman Jerome Powell’s press conference kicks off at 2:30 pm ET.

Too soon for Powell to get dovish

“The bottom line, we think, is that continuing to hike by 50bp per meeting as both the housing market and inflation head rapidly south would be a serious test for the Fed,” Pantheon Macroeconomics economist Ian Shepherdson wrote. “We expect a signal at the June meeting to suggest that the pace of hikes will slow in the second half. but mr. Powell is very unlikely to suggest anything on those lines today; it’s just too soon.”

He will also be watching for any mention of the housing market.

“Housing punches far above its weight as a driver of market and media views of the state of the economy, but the Fed’s reaction to the coming weakening is unclear.”

Financial conditions could mean peak Fed fear

“These financial conditions have tightened in the US and abroad, doing some of the Fed’s work for it already,” eToro strategist Ben Laidler said. “Equity markets are in ‘correction’ territory, real yields are positive, 30-yr mortgage rates over 5%. Whilst inflation expectations tentatively easing from high levels above the Fed 2% target, and inflation rates topping out at near 8.5%. We think we are close to peak inflation rates and peak fear of the Fed, though we have clearly been surprised so far!”

Market braces for a half-point hike

Markets have fully priced in a 50-basis-point boost in the fed funds rate to a range of 0.75%-1%. The rate hike “will occur as the Fed simultaneously embarks on the long-awaited reduction in its balance sheet, which we think will shrink by nearly $3T through the end of 2024, from $8.93T today.” wrote RSM chief US economist Joseph Brusuelas in a note.

Labor market remains tight

The latest JOLTs survey for March showed opening rising to an unexpected all-time high of 11.55M, while the quits rate also rose. Powell has been hoping for some slack in the labor market, which would give the FOMC some more maneuverability in the pace of tightening.

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