Biggest Rate Hike in Over 20 Years
As widely expected, the Federal Reserve hiked its key lending rate, the fed funds rate, by 50 bp (basis points, 1 bp = 0.01%) to a range of 0.75—1.00%. It is the first 50 bp rate hike in over 20 years. As it detailed in its statement, the Fed will also begin letting some of the bonds it acquired in the pandemic runoff its balance sheet starting in June. This was also expected.
The rate increase was no surprise, and there wasn’t an immediate market reaction. Instead, it was comments that came in the press conference that moved the market.
In response to a question, Powell said a 75 bp rate hike “is not something the committee is actively considering.” That was a surprise. He could have kept his options open.
Instead, 50 bp over the next two meetings “should be on the table.” Removing 75 bp sparked a big rally on Wednesday, but Powell may have inadvertently set the stage for Thursday’s selloff.
By pouring cold water on a 75 bp rate hike, the Fed may have sparked Thursday’s turbulent jump in bond yields. A slightly less hawkish message is the opposite of what is needed to combat inflation, and bond investors reacted.
The Fed may be looking at the shrinking balance sheet in lieu of bigger rate hikes. Powell did not elaborate.
The rate increase was no surprise, and there wasn’t an immediate market reaction. Instead, it was comments that came in the press conference that moved the market.
In response to a question, Powell said a 75 bp rate hike “is not something the committee is actively considering.” That was a surprise. He could have kept his options open.
Instead, 50 bp over the next two meetings “should be on the table.” Removing 75 bp sparked a big rally on Wednesday, but Powell may have inadvertently set the stage for Thursday’s selloff.
By pouring cold water on a 75 bp rate hike, the Fed may have sparked Thursday’s turbulent jump in bond yields. A slightly less hawkish message is the opposite of what is needed to combat inflation, and bond investors reacted.
The Fed may be looking at the shrinking balance sheet in lieu of bigger rate hikes. Powell did not elaborate.
