Newsquawk Voice Ltd | Jun 15, 2022 12:53
The FOMC had been expected to hike rates by 50bps to 1.25-1.50% until the hot May CPI figures and rising consumer inflation expectations ignited a wave of 75bps calls to 1.50-1.75%. The Fed guidance initially called for 50bps (both in June and July) had the data evolved as they expected, but after the hot May data, some calls for larger hikes, a 'Volcker moment', fuelled speculative market activity leading into the meeting, and given a slew of publications with high-placed sources (WSJ, CNBC, Bloomberg) have come out suggesting a 75bps hike is indeed possible on the eve of the confab, it is now seen as a base case for many and a near-certainty as per market pricing. Given the evolution of the data, the Fed will be expected to make hawkish adjustments to its guidance via the statement, and in Powell's presser, some suggest another 75bps hike in July even. Furthermore, the accompanying 'Dot Plot' is expected to see ramped implied Fed hikes through 2023 - whispers suggest the median '23 dot could be towards the 4% region vs March's 2.8% forecast. FROM 50 TO 75: BREAKING FROM GUIDANCE:
NEW GUIDANCE: Given the magnitude of moves in the front-end of the rates curve, SGH's Duy believes "Powell will attempt to use this meeting and the press conference to regain control of the narrative." Participants can expect hawkish language adjustments in the statement and presser. Regardless of the June hike increment, the statement will likely introduce commentary on the willingness to move faster/further if required, while Powell's presser is expected to echo that. Meanwhile, markets are keeping a close eye out for commentary around the September meetings and beyond; indeed, part of this will be reflected in the Dot Plot. Pre-May data, several officials had publicly expressed a likely move down to 25bps hikes from September, but that seems highly unlikely now and Powell can be expected to guide closer to the market pricing of a year-end Fed Funds at 3.50-3.75%, which if the Fed hikes 75bps Wednesday, would include 50bps hikes through the remaining four meetings this year. Although that could be front-loaded, as Tim Duy notes, "assuming the Fed wants to ensure that expectations are in control, we may be looking at 75bp again in July." Furthermore, it wouldn't be surprising to see Powell lean into Governor Waller's line of thinking, "not taking 50bp hikes off the table until I see inflation coming down closer to our 2% target". DOT PLOT:
BALANCE SHEET: Little new is expected on the balance sheet runoff with reduced Fed reinvestments now having commenced in line with prior guidance. The only talking point to be expected is a potential nod to when/if they will commence outright sales of mortgage-backed securities.
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