Hikes another 75bps
The Federal Open Market Committee (FOMC) of the
US Federal Reserve (Fed) hiked the federal fund rate by 75bps yesterday to the
range of 2.25% - 2.50%. This is the second 75bps hike in two months. In the
post meeting press interaction the Fed chairman Jerome Powell outrightly
rejected the speculations that the US economy is in recession. The FOMC members
are of the opinion that the strong labor market allows the US economy to
tolerate rapid monetary tightening.
For the first time since February 2020, the
FOMC statement did not mention Covid or coronavirus.
…leaves the door open for further data
dependent hikes
Reiterating the commitment to achieve the 2%
inflation target, Powell also indicated that while another unusually large
increase could be appropriate at our next meeting, the FOMC would set policy on
a meeting-by-meeting basis rather than offer explicit guidance on the size of
their next rate move, as he has done recently; thus, leaving the future course
of the FOMC action wide open.
As per the Bloomberg estimates, the market
consensus is now gathering around two more 50bps hikes in September and
December FOMC meetings, with the fed fund rate peeking around 3.4%, lower than
the previously estimated 3.8%.
The US economy is estimated to have grown at a
tepid 0.4% (QoQ, annualized) rate in 2Q2022 after recording a negative growth
in 1Q2022, technically avoiding a recession. The US officially acknowledges a
recession if the economy logs a negative growth for two consecutive quarters.
Markets react positively to FOMC – stock
rally, yields and USD tumble
The markets took comfort from the growth
outlook and Powell’s statement on future rates being data dependent. The market
participants appear to have concluded that the FOMC may reach the end of the tightening
cycle by the end of 2022, triggering a “risk on” rally in the markets.
·
Battered tech stocks surged
strongly with the benchmark Nasdaq rising 4.06%, the largest one day gain since
November 2020. The broader index S&P500 gained 2.62%.
·
US Dollar Index lost 0.66%.
·
2yr SU Treasury yields fell
10bps; while 10yr benchmark yields were down 5bps at 2.78%.
…but deeper yield curve inversion signals
recession as consensus
The US yield curve is now inverted the most in
two decades, highlighting that the markets strongly believe a recession is
around the corner. The 2yr yields are now over 30bps lower than the benchmark
10yr yields – clearly indicating that the market sees higher risk of recession
than the Fed. The deeper yield curve inversion is seen to imply that Fed may
actually return to the path of easing as early as 2023.
Click here to see a nice
compilation of analysts’ reactions to the FOMC statement.
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