The Federal Reserve again raised rates by 75 bp at their July meeting. The market was pricing in 90.6% for 75 bps and 9.4% for 100 bps. It was not a unanimous vote, however. Kansas City Fed President George did not dissent like last time when she preferred a hike of only 50 basis points. Last month the Fed funds futures curve, the terminal top was in May 2023 at 3.982% with a path of 75/75/50/50 priced in for the next four meetings, including today. This was just the third time the bank raised rates this much since May 2000 when the Fed was led by Alan Greenspan.
Federal Reserve FOMC Statement
Federal Reserve Announcement Wednesday 27 July 2022 14:00:00 ET
The FOMC raises the target rate by 75 basis points to 2.25% to 2.50%
Conference To Follow At 2.30 ET PM With Chairman Powell
Highlights
- Decision was unanimous for raise
- Recent indications of production have softened
- job gains have been robust in recent months
- Repeats that FOMC “is highly attentive to inflation risks”
- Repeats that the FOMC “is strongly committed to returning inflation to its 2 percent objective”
- Balance sheet reduction ongoing as planned
Update: Bond Market Close After FOMC
U.S. Treasuries ended Wednesday on a higher note with issues in the belly of the curve finishing ahead of other tenors. The market showed very little immediate reaction to the Fed’s 75-bps rate hike announcement, but most tenors rallied to fresh highs during Fed Chairman Powell’s press conference.
The Fed chairman said that it will likely be appropriate to slow the pace of rate increases going forward, but also added that another “unusually large” increase could be appropriate at the next meeting. Treasuries remained near their highs into the close while equities added to their gains after the FOMC Statement. The U.S. Dollar Index fell 0.7% to 106.41, giving up the bulk of yesterday’s gain.
Closing Yields:
- 2-yr: -4 bps to 3.00%
- 3-yr: -8 bps to 2.92%
- 5-yr: -9 bps to 2.80%
- 10-yr: -5 bps to 2.73%
- 30-yr: -1 bp to 3.00%
From June FOMC
- The median estimate for the fed funds rate for 2022 is now 3.4%, versus 1.9% in the March projection
- The median estimate for the fed funds rate for 2023 is now 3.8%, versus 2.8% in the March projection
A summary of the central tendencies compared to March shows for 2022:
- GDP 1.7% from 2.8% in March. That is down 1.1% from March
- Unemployment 3.7% from 3.5% in March. That is up 0.2% from 3.5% March
- PCE inflation 5.2% from 4.3% in March. That is an increase of 0.9% from March
- Core PCE inflation 4.3% from 4.1% in March. That is an increase of 0.2% from March
In 2023, the FOMC now sees:
- GDP 1.7% vs. 2.2% in March, down 0.5%
- unemployment 3.9% vs. 3.5% March, up 0.4%
- PCE inflation 2.6% vs. 2.7% in March, down -0.1%
- Core PCE inflation at 2.7% from 2.6% March, up 0.1%
July 27 FOMC STATEMENT CHANGES via @Newsquawk
The two lines of note that change from the June commentary is “the Committee is highly attentive to inflation risks” and that the Fed “anticipates that ongoing increases in the target range will be appropriate.”
The full statement from the July 2022 Fed Decision
Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.
Implementation Note issued July 27, 2022
Source: Federal Reserve
From the TradersCommunity Research Desk