Cry Havoc and Let Slip the Dogs of War.
Chairman Powell and Co delivered a strong message that the war on inflation was not one the Fed would lose as they delivered a 75-bps rate hike today and signalled that 75-bps was on the table for July. The Chairman also made it clear that rates overnight rates need to be moved into restrictive territory.
- Overnight rate is expected to reach 3.4% by year-end and 3.8% sometime in 2023
- The Fed is moving aggressively to a neutral level (approx. 2.5%) as this affords flexibility going forward
- The Chairman noted that business investment and housing showed signs of slowing, although the labour market remained tight
- The Fed is not concerned that Quantitative Tightening will disrupt markets
Conclusion.
- The bond market was priced for a 3.9% terminal rate, so it has rallied to align with the FOMC projection
- The door is open for the Bank of Canada to move 75 bps in July (now the base case)
- With bond markets aligned with FOMC projections, we believe that rate volatility will subside for awhile
