FOMC meeting recap: Was that “Peak Hawkishness” for the Fed?

What did the Fed do?

As almost universally expected, the Federal Reserve opted to raise interest rates by 50bps to the 0.75-1.00% range. This was the largest single interest rate hike since 2000.

Additionally, the central bank announced that it would begin allowing its $9T balance sheet to shrink by $47.5B per month as of June 1, with that amount ramping up to the planned $95B/mo in three months’ time. As with the interest rate decision, this was essentially the market’s baseline expectation.

Finally, the Fed tweaked its assessment of the labor market to “robust” (from “strong”) and noted that “The Committee is highly attentive to inflation risks.” The decision was unanimous.

Fed Chairman Powell’s press conference

As we noted in our FOMC preview report on Monday, the widely-telegraphed monetary policy decision was never going to be a big market mover, and there was no Summary of Economic Projections (SEP) with updates to the central bank’s forecasts at this meeting, so Fed Chairman Jerome Powell’s press conference is the most important consideration for traders.

Now that the Fed’s balance sheet drawdown strategy is well defined, the focus will again shift primarily to the outlook for interest rates. On that front, Powell began his press conference on a relatively hawkish note before downplaying the likelihood of a 75bps (0.75%) rate hike about 20 minutes in:

• INFLATION IS ‘MUCH TOO HIGH’
• ESSENTIAL WE BRING INFLATION DOWN TO KEEP STRONG LABOR MARKET
• LABOR MARKET IS EXTREMELY TIGHT
• UNDERLYING MOMENTUM IN ECONOMY REMAINS STRONG
• PRICE PRESSURES HAVE SPREAD TO A BROADER RANGE OF GOODS AND SERVICES
• ADDITIONAL 50BP HIKES SHOULD BE ON TABLE AT NEXT COUPLE MEETINGS
• FED POLICY HAS BEEN ADAPTING AND WILL ‘CONTINUE TO DO SO’
• INFLATION HAS SURPRISED TO UPSIDE, FURTHER SURPRISES COULD BE IN STORE
• 75 BPS ISN'T SOMETHING FOMC IS ACTIVELY CONSIDERING
• EXPECT TO SEE INFLATION FLATTENING OUT, MAYBE NOT DROP
• FOMC ESTIMATES NEUTRAL RATE AT BETWEEN 2% TO 3%
• LIKELY TO FOLLOW UP 50BP MOVES WITH 25BP RATE HIKES
• IF THAT PATH INVOLVES LEVELS HIGHER THAN NEUTRAL, WE ‘WILL NOT HESITATE TO GO THERE’

For a market that was pricing in a high probability of a 75bps move in June or July, that one statement cast a (relatively) dovish tone on the entire affair. In short, a central bank obsessed with forward guidance, “communication as a policy tool,” and avoiding surprising markets at all costs has essentially given its road map for the summer: The Fed plans on raising interest rates by 50bps in June and July to bring the Fed Funds rate to the lower end of its 2%-3% neutral range, then likely follow that up with a couple 25bps hikes as it evaluates incoming data. Likewise, the balance sheet will gradually draw down on a predetermined schedule for the foreseeable future.

While surprises in incoming data could certainly prompt the Fed to deviate from the plan above, I wouldn’t be at all surprised if Jerome Powell and company outlined exactly how monetary policy will ultimately play out for the next three months, and at the margin, it’s not as hawkish as the market was expecting.

Market impact of the Fed meeting

The initial market reaction to the monetary policy statement was choppy, reflecting the ambiguity about the Fed’s plans moving into the summer, but from the moment Powell downplayed a 75bps rate hike, we’ve seen a risk-on reaction in markets. The US dollar index has dropped to a one-week low in the mid-102.00s, US indices are seeing among their biggest one-day rallies in months, yields are falling across the board, and gold is gaining more than 1% for what could be its strongest day since March.

Moving forward, assuming no big surprises in economic data (especially on the inflation front), traders may look at today’s press conference as marking “peak hawkishness” for the Fed, at least in the short term, and the US dollar may therefore retrace at least a portion of its gains from the first four months of the year. Looking at the US dollar index, a pullback toward the 100.00-101.00 area will be favored as long as resistance in the 103.00-1.03800 range holds:

Source: StoneX, TradingView

What did the Fed do?

As almost universally expected, the Federal Reserve opted to raise interest rates by 50bps to the 0.75-1.00% range. This was the largest single interest rate hike since 2000.

Additionally, the central bank announced that it would begin allowing its $9T balance sheet to shrink by $47.5B per month as of June 1, with that amount ramping up to the planned $95B/mo in three months’ time. As with the interest rate decision, this was essentially the market’s baseline expectation.

Finally, the Fed tweaked its assessment of the labor market to “robust” (from “strong”) and noted that “The Committee is highly attentive to inflation risks.” The decision was unanimous.

Fed Chairman Powell’s press conference

As we noted in our FOMC preview report on Monday, the widely-telegraphed monetary policy decision was never going to be a big market mover, and there was no Summary of Economic Projections (SEP) with updates to the central bank’s forecasts at this meeting, so Fed Chairman Jerome Powell’s press conference is the most important consideration for traders.

Now that the Fed’s balance sheet drawdown strategy is well defined, the focus will again shift primarily to the outlook for interest rates. On that front, Powell began his press conference on a relatively hawkish note before downplaying the likelihood of a 75bps (0.75%) rate hike about 20 minutes in:

• INFLATION IS ‘MUCH TOO HIGH’
• ESSENTIAL WE BRING INFLATION DOWN TO KEEP STRONG LABOR MARKET
• LABOR MARKET IS EXTREMELY TIGHT
• UNDERLYING MOMENTUM IN ECONOMY REMAINS STRONG
• PRICE PRESSURES HAVE SPREAD TO A BROADER RANGE OF GOODS AND SERVICES
• ADDITIONAL 50BP HIKES SHOULD BE ON TABLE AT NEXT COUPLE MEETINGS
• FED POLICY HAS BEEN ADAPTING AND WILL ‘CONTINUE TO DO SO’
• INFLATION HAS SURPRISED TO UPSIDE, FURTHER SURPRISES COULD BE IN STORE
• 75 BPS ISN'T SOMETHING FOMC IS ACTIVELY CONSIDERING
• EXPECT TO SEE INFLATION FLATTENING OUT, MAYBE NOT DROP
• FOMC ESTIMATES NEUTRAL RATE AT BETWEEN 2% TO 3%
• LIKELY TO FOLLOW UP 50BP MOVES WITH 25BP RATE HIKES
• IF THAT PATH INVOLVES LEVELS HIGHER THAN NEUTRAL, WE ‘WILL NOT HESITATE TO GO THERE’

For a market that was pricing in a high probability of a 75bps move in June or July, that one statement cast a (relatively) dovish tone on the entire affair. In short, a central bank obsessed with forward guidance, “communication as a policy tool,” and avoiding surprising markets at all costs has essentially given its road map for the summer: The Fed plans on raising interest rates by 50bps in June and July to bring the Fed Funds rate to the lower end of its 2%-3% neutral range, then likely follow that up with a couple 25bps hikes as it evaluates incoming data. Likewise, the balance sheet will gradually draw down on a predetermined schedule for the foreseeable future.

While surprises in incoming data could certainly prompt the Fed to deviate from the plan above, I wouldn’t be at all surprised if Jerome Powell and company outlined exactly how monetary policy will ultimately play out for the next three months, and at the margin, it’s not as hawkish as the market was expecting.

Market impact of the Fed meeting

The initial market reaction to the monetary policy statement was choppy, reflecting the ambiguity about the Fed’s plans moving into the summer, but from the moment Powell downplayed a 75bps rate hike, we’ve seen a risk-on reaction in markets. The US dollar index has dropped to a one-week low in the mid-102.00s, US indices are seeing among their biggest one-day rallies in months, yields are falling across the board, and gold is gaining more than 1% for what could be its strongest day since March.

Moving forward, assuming no big surprises in economic data (especially on the inflation front), traders may look at today’s press conference as marking “peak hawkishness” for the Fed, at least in the short term, and the US dollar may therefore retrace at least a portion of its gains from the first four months of the year. Looking at the US dollar index, a pullback toward the 100.00-101.00 area will be favored as long as resistance in the 103.00-1.03800 range holds:

Source: StoneX, TradingView

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