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Rates Jump on Surprisingly Hawkish Fed

Yields jump as the Fed signals increasing rates

Swap rates and yields increased dramatically across the curve after the Fed released its policy announcement. As expected, the Fed kept its benchmark rate range unchanged at 0.0% to 0.25%. However, the outlook became more hawkish, with most Fed officials projecting at least one rate hike in 2023. The belly of the curve saw the most significant move as the 5y and 7y yields increasing 11 bps to 0.90% and 1.30%, respectively. The 2y UST yield also hit 1-year highs, closing up 4 bps to 0.21% as investors prepare for the potential rate hikes. Equities moved lower on the Fed announcement, with all three major indices closing down led by the DJIA at 0.77%.

Fed’s dot plot becomes hawkish

The Fed’s dot plot revealed a much more hawkish outlook. Eleven Fed officials are now guiding to potentially two rate increases in 2023 compared to zero increases after the March meeting. Seven Fed officials are now forecasting a rate hike as early as 2022, an increase from 4. The Fed reiterated that their inflation expectations remain “well anchored” at 2 percent, and they will continue the flow of credit by retaining its bond purchasing program of $120B in UST and MBS per month.

Import prices hit highest level since 2011

Adding to inflationary pressures, import prices increased 1.1% in May and 11.3% over the past twelve months, the fastest pace since 2011.

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