Fed Makes it Official

The FOMC hiked rates by a quarter point and signaled it will hike rates at each subsequent Fed meeting this year. While the rate hike was anticipated by the market, the new Fed’s indication that it expects to hike rates an additional six times this year caught the market by surprise. In his press conference, Fed Chair Powell also signaled that the FOMC may accelerate that timeline, implying the central bank could use multiple 50bp rate hikes if inflation remains persistently high:

Fed’s commitment to fighting inflation pushes rates higher for 8^th consecutive session. The Fed’s return to its primary mandate has fully resolved (at least for now) the growth scare and flight to quality kicked off a few weeks ago by the Russian invasion of Ukraine. On the day, 2-year yields climbed by as much as 15 basis points before pulling back to close at 1.94% – a remarkable 120 basis points above where we started the year. The long end also closed higher, 10-year yields climbing 4bps to close at 2.19%, nearly 50bps higher than where they closed on March 4^th.

Quantitative tightening on the horizon. Another potent policy tool at the Fed’s disposal will be the reduction in the size of its balance sheet. While the Fed kept the details around its plans for the reduction, it did say that it would begin to reduce its holdings at “a coming meeting.” While rate hikes get all the attention, we may see the FOMC turn to “QT” as a lever if inflation does not normalize as expected. A side by side comparison of the FOMC’s meeting minutes from today and January’s meeting can be read here.