Market Downgrades Probability of Double Hike in March

FOMC minutes confirm hawkish pivot, but offer little in the way of new information. Today’s Fed minutes confirmed what the market has known for weeks, that the FOMC will use both rate hikes and balance sheet runoff to address inflation. A 50bp rate hike was not discussed, which lead to a rally at the very front end of the curve, leaving the implied probability of a 50bp hike at only 44% (down from 90%+ last week). The minutes, while hawkish, were not unexpectedly so, helping quiet (perhaps temporarily) whispers of an emergency rate hike or a 50bp rate hike in March.

Benign FOMC minutes help boost risk assets, short-dated bonds. Today’s FOMC minutes did not surprise in their hawkishness, helping risk assets climb after a challenging start to the year. Rates were little changed at the long end, but rates at the short-end rallied substantially, 2-year Treasury yields declining 6 bps to close at 1.52%.

Day ahead. Tomorrow, markets will get the latest housing starts data for the month of January. Initially jobless claims and the Philadelphia Fed’s latest business outlook will round out the day.