All Eyes On The FOMC

Swap rates, Treasury yields rise ahead of Fed decision day. The market was risk-on today ahead of the Fed’s announcement of its rate hike decision, with equities and Treasury yields soaring higher and the VIX “fear proxy” plummeting. The VIX saw its largest two-day decrease since May of 2022, a sign that recent coordinated backstops in the banking sector have eased anxiety surrounding further collapses. Treasury yields continued their surge from mid-day yesterday, the 2-year yield rising 19bps to 4.17% and the 10-year yield rising 12bps to 3.61%. Tomorrow’s Fed press conference will likely be a source of significant pricing volatility, as it remains unclear whether the Fed will prioritize stubborn inflation or the troubled banking sector.

FOMC Preview. Tomorrow’s much awaited March FOMC meeting likely holds a 25bp hike, and more importantly, commentary that markets hope will shed light on the path of future hikes. Also top of mind are the updated economic projections that will be released following the meeting. In early March, Chair Powell said that the FOMC might raise rates above the 5.1% median forecast from late December, implying that the peak rate forecast may be raised. This outlook is complicated, however, as the committee is caught between persistent inflation and a U.S. banking sector facing HTM losses and deposit outflows. A senior economist at Barclays noted, “The difficult thing for the FOMC at this meeting will be the tension between bringing down inflation and financial stability risks.” Futures markets are pricing an ~80% chance of a 25bp hike tomorrow, followed by a 25bp hike in May, no change in June, and a 25bp cut in July.  

Day ahead. The Fed will announce their rate hike decision tomorrow at 2 PM ET, which will be followed by a press conference at 2:30 PM. Mortgage rate and application data will lead the day at 7 AM.