Fed Hikes Rates and Prepares the Market for QT

The Federal Open Market Committee (FOMC) met today for the third time this year to update the public on the state of the U.S. Economy and the Committee’s decision on monetary policy.

What We Learned

The FOMC decided to raise the Federal Funds Target Rate (fed funds) by 50 bps. The target band now stands at 75-100 bps. This was well telegraphed by the FOMC leading to a muted market reaction. This is the first time that the Fed has hiked rates at consecutive meetings since 2006 and the first 50 bps hike since May 2000.

- The market currently reflects a 50 bps increase at each of the next 2 meetings (June 15 and July 27).

- The market has currently priced in 200 bps of additional rate hikes by the end of the year.

- The Committee also announced its plan for Quantitative Tightening (QT).  Beginning in June, the plan is to run down the balance sheet over a phased in period and max out at a monthly cap in September of $60 billion of U.S. Treasury securities and $35 billion of agency mortgage-backed securities. The plan for reducing the balance sheet was covered in the most recent FOMC meeting minutes and expected by market participants.

Chair Powell provided additional commentary at the post FOMC meeting press conference, stating that the Fed is very serious about getting inflation back to its target. The key unknowns remain how high and how fast the Fed increases the target rate. As typical, all future actions will be subject to the data and market conditions.

 

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