U.S. Treasury ratesn
U.S. Treasury rates briefly moved up after the FOMC embraced a steeper path for interest rate increases, but then reverted lower during Powell’s press conference after he indicated that he doesn’t expect 75 basis points hikes to become common. The pullback in yields pushed the S&P 500 and Nasdaq 100 to session’s highs. Nasdaq 100 futures, for example, surged as much as 3% during these comments.
The Fed did something today that it has not dared or needed to do since 1994 in a single meeting: it raised borrowing costs by 75 basis points, bringing the federal funds rate to 1.5%-1.75% – aligning the decision with market forecasts. Today’s forceful hike, the third during the ongoing tightening cycle, should be taken as a clear indication that the FOMC is getting very nervous about blistering price pressures in the economy and is desperate to regain control of the narrative after being criticized for falling behind the curve by waiting too long to start removing accommodation.
Until last week, Wall Street had anticipated a half-point adjustment identical to the one delivered last month and in line with central bank guidance, but expectations for a larger move firmed in recent days after May’s U.S. CPI blew past market estimates, soaring 8.6% y-o-y, its highest level since 1981, squashing hopes that inflation has peaked.
Wednesday’s 75 bp increase, which runs counter to previous communications, is likely to boost policy uncertainty and create confusion about how the institution reacts to new information by suggesting officials are losing confidence in their own forecasts. All of this raises the possibility that the FOMC could deviate from prior guidance in the future at the drop of a hat if inflation figures continue to surprise to the upside, a situation that could fuel further volatility around the release of key economic reports.
The FOMC communique took a constructive view on the economy, recognizing that activity appears to have picked up after edging down in the first quarter and that the labor market remains strong. On inflation, the FOMC indicated that the invasion of Ukraine and related events are creating upward pressure on prices, complicating the growth outlook. The communique also noted that officials are attentive to inflation risks. With respect to monetary policy, the statement language didn’t change much, reiterating that the committee anticipates that ongoing increases in the target range will be appropriate. This time the bank raised rates by 75 bps, so these comments may signal additional 75 bp hikes in the future.