Jessica Noviskis, CFA
All eyes are on rates this week as the Federal Open Market Committee (FOMC) convenes for the third time this year. In the seven weeks since the March meeting when the Committee raised rates an initial 25 basis points, continued inflationary pressures and an increasingly hawkish tone from Chairman Powell and other FOMC members have driven up market expectations for future hikes. The futures market has gone from pricing in a total of six 25 basis point increases and a year-end federal funds rate of 1.94% to ten hikes, including three consecutive 50 basis point increases, and a year-end rate of 2.81%. If market expectations prove correct, it would be the steepest pace of increases since the 1980s.
For a central bank that never quite normalized policy after the GFC, cooling decades-high inflation without tipping the economy into recession amid strained supply chains, a war in Europe, and COVID lockdowns in the world’s second-largest economy will be no easy task. Recent market volatility and sentiment reflect this uncertainty, with both equities and bonds down sharply year to date. While first quarter U.S. GDP “growth” of -1.4% missed expectations, the contraction was driven by trade and inventories as opposed to a consumer slowdown. The U.S. consumer is still strong, but the path forward is uncertain, with the yield on the 10-year Treasury — a key reference point for borrowing costs — briefly surpassing 3% yesterday for the first time since 2018. The Fed has to consider many moving pieces as it plans its path from here, and we look forward to hearing more about that process at Chairman Powell’s press conference tomorrow.
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