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Fed Hikes Rates by 0.5% for the First Time Since 2000

Financial markets were largely unresponsive to the well-telegraphed 50bps hike by the FOMC, but volatility ensued in the press conference afterward when Fed Chair Powell struck down the idea of a 75bps hike at a future meeting. Leading up to today, market futures had priced a high likelihood of a 75bps hike at the June meeting. With that now off the table, yields/rates declined 3-12bps across the curve in a bull steepening pattern, while major US equity indices rose 2.80%-3.20% (S&P 500’s largest daily rise since May 2020).

Fed hikes rates by 50 basis points to a 0.75% – 1% range. Despite robust job growth and a lower unemployment rate, Fed officials believe inflation and global supply chain disruptions still pose major economic risks. During his announcement, while Fed Chair Powell said a 0.75% hike is off the table, “there is a broad consensus (among Fed policymakers) that additional (half-point) rate increases should be on the table at the next couple of meetings.” Officials plan to hike rates “expeditiously” over the next few meetings until the Fed’s benchmark rate returns to its neutral rate of 2.25% – 2.5%. If inflation continues to jump higher, Powell commented the Fed “will not hesitate” to raise rates past their target range to a “restrictive” level that would curb growth. The FOMC statement can be read here.

Private payrolls rose by 247k in April, well below the 383k estimate. The ADP’s chief economist commented, “While hiring demand remains strong, labor supply shortages caused job gains to soften for both goods producers and services providers.” The leisure and hospitality sector led the pack with 77k additions, followed by the professional and business services sector adding 50k and the health services sector adding 48k. Friday’s jobs report will offer a more robust view of the labor market, with economists expecting nonfarm payrolls to grow by 385k and a 3.5% unemployment rate.

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