The FOMC voted unanimously to increase its target for the federal funds rate to a range of 4.75% to 5.0%, the highest since September 2007. The Committee stated “the banking system is sound and resilient” but at this juncture it is very difficult to discern how big the impact will be. At this juncture it is believed the issues are centered in a small number of banks.
The “dot plot” of rate increases indicate a terminal year end rate around 5.1%, unchanged from the last update in December; year end 2024 projection rose to 4.3% from 4.1%.
The Fed stated it will continue the same pace of shrinking its balance sheet (aka QT) though recent emergency measures have swelled assets once again. The central bank will keep monthly caps of $60 billion for Treasuries and $35 billion for MBS.
The initial take on this was dovish: the end in the tightening cycle is perhaps close; stocks initially rose nominally and the two-year Treasury yield declined about 5 bps as the terminal rate was left unchanged.
However, a moderate selloff in equities occurred following Powell’s comments the Committee is prepared to hike rates further if necessary, in an attempt to reinforce the anti-inflation theme. Regional banks also sold off around this time after Treasury Secretary Yellen stated the government is not considering a broad increase in deposit insurance.
Short term Treasuries fell further in yield.
Despite adamant Fed statements about the direction of monetary policy, the markets further priced in more interest rate cuts this year with the year ending rate of around 4.08%.
Who is correct? The Fed who controls the levers or the market? Many years ago, I learned “Don’t fight the Fed.”
What will happen today?
Last night the foreign markets were down. London was down 1.10%, Paris down 0.70% and Frankfurt down 0.79%. China was up 0.64%, Japan down 0.17% and Hang Seng up 2.34%.
Futures are up about 0.3% on the belief the Fed will pivot in the June/July time period with short term rates ending about 75-100 below current or expected levels. The 10-year is off 15/32 to yield 3.50%. The two year is up 2 bps to yield 4.0%.
