Hawkish Federal Reserve Again Raises Rates 75bps as Expected, March 23 Terminal Rate Higher

The Federal Reserve again raised rates by 75 bp at their September meeting. The market was pricing in 84.0% for 75 bps and 16.0% for 100 bps. It was a unanimous vote. Markets reacted to the dot plot, which shows higher terminal rates and the Fed holding higher for longer. Money market pricing largely unchanged for rest of 2022, with 75bps in Nov priced at 80% probability 50bps then priced for Dec. Hawkish 4.6% 2023 Fed dot has seen terminal rate in Mar’23 extend higher from 4.5% beforehand to 4.6%.

Fed Boardroom

Federal Reserve FOMC Statement 

Federal Reserve Announcement Wednesday 21 September 2022 14:00:00 ET

The FOMC raised the target rate by 75 basis points to 3.30% to 3.25%

Conference To Follow At 2.30 ET PM With Chairman Powell

Highlights

  • Decision was unanimous for raise
  • Repeated prior statement “Committee is strongly committed to returning inflation to its 2 percent objective”.
  • Recent indicators point to modest growth in spending and production (repeats last statement)
  • Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures
  • The Committee is highly attentive to inflation risks (repeats last statement) No dissents

Market Reaction After FOMC

The US dollar moved higher.

  • EURUSD from 0.98742 low reached 0.98118.
  • GBPUSD low of 1.12349. from 1.1323 just before the rate decision.
  • USDJPY high of 144.69 from 144.23 just prior to the release.  
  • USDCAD was trading at 1.3387 just before the release to 1.3434 high above the September 20, 2020, high at 1.34194.

Stocks lower

  • Dow industrial average -210 points or -0.68% at 30495 was trading up 154.74 points or 0.50% just before the release
  • S&P index -25 points or -0.66% the 3830.36 was trading up 26.43 points or 0.69% before release
  • NASDAQ index -90.57 points at -0.79% 11334.98 was trading up 83.91 points or 0.73% at 11508.96 before release

Interest rates have increased especially in shorter tenors

  • U.S. Treasuries fell to fresh lows in immediate reaction The 10-yr note and shorter tenors went near their lows while the long bond bounced back into positive territory, reflecting persistent expectations for an eventual slowdown in growth as a result of the rate hike cycle.

Yields After Release on Day:

  • 2-yr: +13 bps to 4.10%
  • 3-yr: +14 bps to 4.08%
  • 5-yr: +8 bps to 3.83%
  • 10-yr: +3 bps to 3.60%
  • 30-yr: -2 bps to 3.56%

FOMC released its latest economic projections,

The median 2022 PCE expectations rising to 5.4% from 5.2%

  • The fed funds rate range is now expected to reach 4.1-4.4% by the end of the year, up from the previous forecast for a peak between 3.1% and 3.6%. See a Fed funds rate at a median 4.6% at the end of next year
  • The median forecast for 2023 fed funds rate range peak was increased to 4.4-4.9% from 3.6-4.1%.
  • Perspectives: A year ago there was not a single Fed dot above 0.75%. The Fed will ultimately go where the data takes it and if you believe inflation is coming down or a recession is coming, that’s the trade and not the Fed.
  • The fear trade is +5% Fed funds at this point, 2 years went over 4%
Fed Rate Rises via WSJ

September 21 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 September 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 Sept 21, 2022

Source: Federal Reserve

From the TradersCommunity Research Desk