Tl:dr; Fed raises rates by 25 bps as expected.
Policy statement softens the rate guidance in a way consistent with past pauses and The Fed deletes reference to “some additional policy firming may be appropriate.”
A clear hat-tip to the banking crisis:
“Recent development are likely to result in tighter credit conditions” removed and replaced with “Tighter credit conditions”
The decision was unanimous.
As WSJ Fed Whisperer Nick Timiraos notes: “The FOMC statement used language broadly similar to how officials concluded their interest-rate increases in 2006, with no explicit promise of a pause by retaining a bias to tighten.”
This is clearly more of a hawkish pause since it doesn’t suggest whether ‘policy easing’ may be appropriate…
…but then again, if Powell had gone that far, markets would have panicked over “what does he know”?
What happens next?
* * *
Since March 22 (the last FOMC statement, which included the dot-plot and economic projections), markets have been ‘just a little bit turbo’ but amid all that vol, bonds and stocks are modestly higher while the dollar has tumbled and alternative currencies (bitcoin and gold) have outperformed…
Source: Bloomberg
However, The Fed’s preferred recession rate-spread indicator (3-month/18-month forward) is now flashing red implying a 94% probability of a recession within the next year
Interestingly, the market’s expected rate trajectory of The Fed has shifted somewhat hawkishly, mainly due to the plunge in rate-hike odds that occurred on the day of the FOMC meeting…
Source: Bloomberg
Rate-hike expectations have drifted higher since the last FOMC…
Source: Bloomberg
Today’s 25bp hike is a lock from the market’s perspective, but what is really the focus today is any hints that The Fed is done (and the market for now, is convinced they will be with just 5% odds of a 25bp hike in June).
But, the market remains massively dovishly divergent from The Fed‘s dotplot rate expectations for this year and next…
As we noted earlier, a single sentence in the FOMC statement will change everything everything today and all eyes will also be on whether there are any dissents.
Federal Open Market Committee raises benchmark rate by 25 basis points, as forecast, to target range of 5%-5.25%
This hike moves Real Rates positive for the first time since 2019…
FOMC omits prior language saying “some additional policy firming” may be warranted, suggesting Fed could pause at the next meeting
FOMC will take into account various factors “in determining the extent to which additional policy firming may be appropriate”
And the vote was unanimous.
Additionally, The Fed highlights the impact of the banking crisis:
FOMC says tighter credit standards likely to weigh on inflation, economy
QT continues:
The Fed maintains plan to shrink balance sheet each month by as much as $60 billion for Treasuries and $35 billion for mortgage-backed securities.
As WSJ Fed Whisperer Nick Timiraos notes: “The FOMC statement used language broadly similar to how officials concluded their interest-rate increases in 2006, with no explicit promise of a pause by retaining a bias to tighten.”
This is clearly more of a hawkish pause since it doesn’t suggest whether ‘policy easing’ may be appropriate… but then again, if Powell had gone that far, markets would have panicked over “what does he know”?
Finally, read the full red-line below:
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