Fed Hikes Rates By 0.75%

The Fed followed through on the market’s expectations by hiking rates 75 bps. The rate hike moves the Fed’s target range to 1.5%-1.75% and helped restore at least some credibility to the challenged central bank. That said, Fed Chair Jerome Powell did not commit to a 75bp hike in July, which led to a fairly pronounced rally in rates, particularly at the front end of the curve where rates declined by over 20 basis points. The 10-year Treasury yield ended the day 18bps lower at 3.28%, though it remains nearly 20bps higher over the past 5 sessions.

FOMC statement, press conference show increasing concern about inflation. In his press conference, Powell reaffirmed that the FOMC is “highly attentive to inflation risks” and added that extended COVID lockdowns in China and the continued conflict in Ukraine will continue to put pressure on prices. That sentiment was echoed in the FOMC’s announcement which reiterated the Fed’s commitment to getting inflation to its 2% target. The Fed’s plans for “quantitative tightening” remain largely unchanged, and may serve as a future policy tool if rate hikes prove insufficient.

Retail sales drop 0.3% in May, well below estimates. Following the 0.7% jump in April, surging gas prices and a steep drop in vehicle sales contributed to May’s sharp decline. Stripping out the 3.5% decrease in vehicle sales, retail sales rose 0.5% last month. Although inflation pressures continue to limit consumer spending in most sectors, restaurant and bar sales continue to remain a bright spot, rising 0.3% M/M.