On May 4th at 2 PM ET, the US interest rate was hiked 50bps to 1% - as expected.
Here is a summary of some of the noteworthy comments from both the FOMC statement and Fed Chair Powell's press conference following the release:
The Federal Reserve raises the key overnight interest rate by 0.5% to 0.75-1% and anticipates ongoing increases in the target range will be appropriate. We have a 30 billion monthly maximum on treasury balance sheet reductions and $17.5 billion for mortgage-backed securities reductions.
On June 1st, the Federal Reserve will begin shrinking its balance sheet, we will begin trimming the balance sheet, starting with a $47.5 bln cap on monthly runoff, and rising to $95 bln monthly after three months. When reserve holdings are slightly over the level it considers to be compatible with enough reserves, the Fed aims to slow and then cease the fall in the size of the balance sheet.
With proper monetary policy firming, the Fed anticipates inflation to return to the target of 2% and the labor market is to stay solid.
Russia's invasion of Ukraine is wreaking havoc on the country's people and economy. Moreover, supply chain disruptions are anticipated to be exacerbated by COVID-related lockdowns in China.
Looking Ahead following the FOMC Statement
FedWatch: More than 200 bps of more Fed tightening is priced into US rate futures in 2022, implying a Fed funds rate of 2.9% this year.
Interest rates futures suggest a 94% probability of the effective Fed funds rate of at least 2.75% at year-end.
Interest rates futures suggest a 35% probability of the Fed funds rate of 3%-3.25% at year-end, VS 52% before FOMC.
Swaps are losing faith in a 75 BPS June hike, giving up on bets in the wake of the FOMC statement, however, Fed swaps briefly showed a 50% chance of a 75 basis-point June hike.
Press Conference with Fed Chair Powell
Powell opened the press conference by saying: "Inflation is way too high."
Inflation is still well above the longer-term target of 2%. We are very concerned about the threats that inflation poses to both sides of the mandate. We believe that continued interest rate hikes are justified.
Additional 50 bps increases should be on table at the next couple meetings, but a 75-bps rise is not something we are considering.
This caused strength in US stocks and downside movement in the DXY.
For the time being, the actual rate of agency MBS runoff will be less than the cap amount.
We have a good probability of a "soft-ish landing."
Wages are rising at the fastest pace in many years, and the labor supply remains subdued. For the labor market, we believe supply and demand will rebalance. Wages are running high, especially in the services sector.
The Ukraine war is likely to restrain economies abroad and create spillover to the US, however, the ramifications of the Russia-Ukraine war are highly uncertain.
Powell reiterates the Fed's goal of 2% inflation, reminding us that the Fed has the tools in order to achieve this. Inflation has shocked to the upside, and more may be on the way.
We're focusing on employing tools to get inflation back to where we want it to be.
We will try not to add to the already high level of uncertainty in the environment.