May 4th FOMC Follow-Up

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Rates

  • The FOMC voted unanimously today to increase the federal funds target rate to a range of 0.75 – 1.00%. This outcome was widely anticipated by markets and had been foreshadowed by Chairman Powell in April.
  • The 50 basis point rate increase marks a departure from recent Fed behavior, in which 25 basis point increments have been the norm. The last time the Fed raised rates by half a percent was in 2000.
  • Market reaction was positive, with US equities ending the day with solidly positive returns and the S&P 500 up nearly 3%.
  • Chairman Powell’s comment in today’s press conference that the committee is not actively considering a 75 basis point hike at a future meeting likely helped drive confidence among equity investors.
  • Futures implied probabilities suggest the market is currently pricing in a 25 basis point hike at the June FOMC meeting.

Fed Balance Sheet

  • Today’s FOMC statement also brought forth a plan for reducing the size of the Fed balance sheet.
  • The Fed will begin to reduce the size of the balance sheet beginning on June 1 by allowing up to $30 billion per month in Treasury securities and $17.5 billion per month in agency debt and agency MBS to be redeemed from the Fed’s holdings.
  • The plan communicated today calls for those amounts to double to $60 billion and $35 billion respectively beginning in September.
  • The Committee did not communicate a specific end date for balance sheet redemptions or provide a target value for Fed holdings, noting only “the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.”

Economic Conditions

  • The FOMC statement added a comment regarding the impact of Covid lockdowns in China, stating “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”
  • Fed Chairman Powell took efforts to highlight the Committee’s attention to the challenges created by inflation in his opening statement during today’s press conference, and the FOMC included a new comment in its statement, noting that “The Committee is highly attentive to inflation risks.”

The FOMC is next scheduled to meet June 14-15, 2022

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