Yields surge on hawkish Fed. The yield curve flattened today as the FOMC meeting revealed a hawkish tilt, creating upward pressure on short-dated treasury yields. The 2-year yield ultimately closed 13 bps higher at 4.18%, while the 30-year yield closed 1bp lower at 4.93%. Futures markets now have a rate hike fully priced in for the October FOMC meeting, despite the recent decline in oil prices as the US and Iran near a peace deal. Meanwhile, equities continued yesterday’s slide, with the S&P 500 and NASDAQ closing 1.21% and 1.34% lower.
Fed holds rates steady, strips easing bias from policy statement. In a unanimous decision, the Fed voted to hold its target rate at 3.50-3.75% for the fourth consecutive meeting. The quarterly Dot Plot indicated a hawkish shift, with nine officials seeing at least one rate hike this year and six seeing at least two. Fed Chair Kevin Warsh declined to offer a rate projection, stating at his first press conference as chair that “so-called forward guidance was not well-suited to the current policy conjuncture.” The FOMC’s post-meeting statement was noticeably shorter than prior releases and stripped of its easing-bias language. The committee described economic activity as “solid” while noting that inflation remains elevated. Inflation forecasts increased to 3.6% from 2.7% and the growth outlook trimmed to 2.2%. The full FOMC statement with a side-by-side comparison from the last meeting can be read here.
Retail sales reflect consumer strength despite elevated energy costs. Headline retail sales rose 0.9% in May, marking the fourth consecutive month of increases and surpassing expectations of a 0.6% gain. 11 out of 13 categories posted increases, with motor vehicle sales seeing its biggest advance in nearly a year and online spending climbing for the fifth straight month. Meanwhile, spending at restaurants and bars saw a 0.1% decrease, though the category posted a strong gain in April. Shruti Mishra, an economist at Bank of America, said, “Spending is pretty broad-based. This isn’t a fluke. The consumer appears to have made it through the worst of the energy shock relatively unharmed.”
