The Fed issues a 75 basis point rate hike, in line with market expectations. Market reaction muted thus far.
QUICK LOOK:
Federal Reserve announces a raise in interest rates to a new range of 1.50% to 1.75%, up 75 basis points (in line with market expectations).Federal Reserve anticipates ongoing increases to the Federal Reserve funds rate.Fed hikes 2022 inflation outlook to 3.4%, up from 1.9%.Largest rate hike since 1994.Fed cuts 2022 GDP growth forecast by -1.1%, from 2.8% to 1.7%.Core inflation outlook will decline to its target of 2.3% by 2024.One descent, Esther George, wanted a 50 basis point increase rather than 75.Fed anticipates additional increases to come.
Lead-up to the FOMC
Over the past week, the market has been dropping like a rock, with the S&P down more than 7% since Wednesday. Conversely, the 2-Year Treasury Yield is up more than 20% over the same period.
Much of this move can be blamed on Friday’s record-breaking CPI Report, which indicated that the US economy had reached a 40-year inflationary high. That painful report puts a lot of pressure on the Fed to use all of the tools at their disposal to fight inflation.
Those tools include things like balance sheet reductions, increased size and pacing of rate hikes (including the potential use of inter-meeting rate hikes), and more. Even the words that Jerome Powell uses in his post-FOMC speech must be carefully chosen to prevent adverse reactions.
Market expectations ahead of the FOMC
Alongside that CPI data came a shift in market perception about the expectation of rate hikes. While the market was pricing in 50 basis points in June and July, that has now increased to an expectation of 75 basis points per meeting. Here’s a full look at the market’s expectations as of June 2022:
June: 75bpJuly: 75bpSeptember: 50bpNovember: 50bpDecember: 25bp
Unusual Option Activity: How the Smart Money positioned themselves with options
Option order flow on Friday became highly bearish, with a high put/call ratio, and a multitude of high-cost put option trades being placed on (SPY) – Get SPDR S&P 500 ETF Trust Report, QQQ, IWM, and ARKK. Many of those bearish trades have become highly profitable, with the market dropping significantly since then.
On the eve of the event, the action has gotten mixed. Big trades were placed on both sides: a sign of how nimble institutional traders are forced to be during highly volatile events like this.
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