Market Wire - Fed Meets Market Expectations In Hiking 50 Basis Points, Dollar Flatlines

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

The Federal Reserve accelerated its exit from unprecedentedly-loose pandemic-era monetary policy settings this afternoon, opting for the biggest rate increase in decades. At the conclusion of its two-day meeting, the Federal Open Market Committee voted to raise the target range for the federal funds rate to 0.75 to 1 percent, and indicated the central bank would begin allowing $30 billion in Treasury holdings and $17.5 billion in mortgage-backed securities to mature without replacement each month - a passive rolloff that will accelerate after three months to $60 billion and $35 billion, respectively. 

The Fed typically prefers to move in 25 basis point increments, and last increased rates by 50 basis points in May 2000. 

Building on recent evidence of historically-tight labor markets, the official statement said, “Job gains have been robust in recent months, and the unemployment rate has declined substantially”. Last week’s disappointingly-weak gross domestic product number was noted, but domestic fundamentals were emphasized:  “Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong”.

And inflation concerns grew, with the statement highlighting “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures”. Policymakers also acknowledged inflation uncertainties related to the war in Ukraine, saying, “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity”, and said, “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions”. 

Ten-year Treasury yields dipped slightly on the announcement, depressing the dollar very modestly. Markets now expect a total of 8 hikes over the remainder of the year, a pace that implies double-barrelled moves are likely to come in the next three consecutive meetings. 

With no “dot plot” Summary of Economic Projections set for release at this meeting, markets will focus on Jerome Powell’s comments during the post-meeting press conference, set to begin at 2:30. The Chair is expected to ratify prevailing market expectations, but any shift in guidance on the pace and scale of future increases, or on so-called “neutral rate” estimates could trigger a reaction in currency markets.