A hawkish Fed statement has Treasury yields rising, stocks paring gains and bets on six more rate hikes between now and the end of the year.
Updated at 2:30 pm EST
The Federal Reserve made its first rate hike in three-and-a-half years Wednesday, while adding that further and faster rate hikes will likely be needed to tame the fastest inflation in more than four decades.
The Fed lifted its Fed Funds rate by 25 basis points, to a range of 0.25% to 0.5%, and said it was prepared to “adjust rates further” in order to combat faster inflation. The central bank’s median view of follow-on hikes, data from the release indicated, suggests six more increases between now and the end of the year as it assess “Readings on public health, labor market conditions, inflation pressures and inflation expectations.”
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the Fed said in its official statement. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the Fed said. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
U.S. equities pared earlier gains following the Fed statement, with the Dow Jones Industrial Average marked 15 points lower on the session, while the S&P 500 was marked only 11 points higher from last night’s close.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.3% lower higher, but close to a two-and-a-half year low of 98.755, while benchmark 10-year Treasury note yields moved to 2.23%, the highest since May of 2019. At the lower end of the curve, 2-year yields hit 2%, the highest since July 2019.
“The Fed finally made it official—no surprises there. The market may welcome some certainty amid no shortage of concerns these days. And with the projection of six more hikes, expectations are pretty much in line,” said Mike Loewengart managing director, investment strategy at E*TRADE from Morgan Stanley. “Keep in mind that the risk remains that attempting to tame inflation by raising rates crosses the line from cooling a too-hot economy to freezing it, which could pressure corporate earnings and, ultimately, stock prices.”
Prior to the Fed statement, the CME Group’s FedWatch tool was pricing in 48.6% chance of a May rate hike, with a 20.1% chance of a follow-on move at the next meeting in June. Those odds are now 43.7% and 46.5% respectively.
The Fed also punted on winding down its $8.9 trillion balance sheet, but will issue new economic projections for 2022 that are likely to reflect that energy-price and supply chain-driven slowdown captured by the Atlanta Fed’s GDPNow forecasting tool, which currently shows the economy growing at a 0.5% clip.
U.S. consumer confidence hit a ten-year low this month, according to the University of Michigan’s closely-tracked data set, amid the energy price surge triggered by Russia’s invasion of Ukraine on February 24.
U.S. retail sales growth slowed sharply last month, data from the Commerce Department indicated Wednesday, suggesting fading sentiment and surging inflation pressures are starting to take their toll on consumer spending.
Meanwhile, U.S. inflation accelerated to the fastest pace in four decades again last month with the recent surge in oil and gas prices linked to Russia’s war on Ukraine likely to keep rates elevated well into the second half of the year.
