What exactly are markets expecting and how can you trade the event?
Here are points you need to know:
What happened last time?
- FOMC raised rates by 50 bps from 0.50% to 1.00% as expected
- Fed to begin reducing its balance sheet on June 1
- Powell: Fed not actively considering a 75bps rate hike
- Powell: It will not be easy to achieve a “soft landing”
After months of speculations, the Federal Open Market Committee (FOMC) raised the target range of its federal funds rate by 50 basis points to a max of 1.00%.The Fed also announced that it would begin trimming its Treasury securities and agency debt and agency mortgage-backed securities holdings starting June 1.
In his presser, Chairman Powell hinted that his team would raise interest rates by another 50 basis points in the next two meetings but that they didn’t think a 75 bps increase was on the table.
The hawkish plans initially sent the dollar higher, but traders eventually focused on a bit of profit-taking and pricing in the rejection of the 75 bps hike.
USD traded tightly for most of the day, spiked higher during the statement release, and eventually traded at new intraday lows at the end of the day.
What are traders expecting this time?
- Another 50 basis point rate hike to 1.50%
- New growth and inflation projections since March
- FOMC presser may give clues to plans beyond the July rate hike
We already know that the Fed will raise its rates by another 50 bps this month. We also know that the team will follow it up with a third 50-bps rate hike in July.
But what happens AFTER July?Many believed that the Fed would pause to reassess the impact of their sharp increases until September when they might resume raising rates.
The Fed Fund futures, which are a direct reflection of market expectations regarding changes to the Fed’s monetary policy, began pricing in even a higher interest rate level at the end of the year, signaling we have NOT yet reached peak hawkishness.
We might get more clues when we see the Fed’s revised growth and inflation projections.
In its March projections, Fed members saw PCE inflation peaking at 5.5% in 2022 and interest rates rising to 1.75%.
Fast forward to today and inflation and interest rate projections will likely be revised a s̶m̶i̶d̶g̶e̶ lot higher.
If June’s inflation figures come in waaay higher than March’s estimates, then we can guesstimate how far June’s 1.50% interest rate is to a “neutral” interest rate and see how aggressive the Fed needs to be to meet its targets this year.
Unless we see another round of profit-taking, the prospect of sharper or more Fed rate hikes will push the USD higher against its counterparts.