Fed Watch: First half-point hike in 22 years priced in

Fed Watch: First half-point hike in 22 years priced in

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Here’s what you should know about Wednesday’s interest rate decision from the Federal Reserve.

FOMC’s announcement comes at 14:00 ET and Fed Chairman Jerome Powell’s press conference starts at. 14:30 ET.

Too early for Powell to become a pigeon

“We believe the conclusion is that continuing to increase by 50 bp per meeting as both the housing market and inflation move rapidly south will be a serious test for the Fed,” wrote Pantheon Macroeconomics economist Ian Shepherdson. “We expect a signal at the June meeting which indicates that the pace of increases will slow in the second half. But it is very unlikely that Mr. Powell is proposing anything in that direction today; it is just too early.”

He will also look at whether the housing market is mentioned.

“Housing is far above its weight as a driver of market and media views on the state of the economy, but the Fed’s response to the coming downturn is unclear.”

Financial conditions could mean top Fed fears

“These economic conditions have tightened in the United States and abroad, and have already done some of the Fed’s work for it,” said eToro strategist Ben Laidler. “Equity markets are in ‘correction’ territory, real interest rates are positive, 30-year mortgage rates above 5%. While inflation expectations are currently declining from high levels above the Fed’s 2% target, and inflation rates are peaking at close to 8.5%. We believe we is close to top inflation rates and top fears for the Fed, although we have clearly been surprised so far! ”

Market regulation for a half-point hike

The markets have fully priced in a 50 basis point increase in the Fed Funds interest rate to an area of ​​0.75% -1%. The rise in interest rates “will occur when the Fed simultaneously begins the long-awaited reduction in the balance sheet, which we believe will shrink by almost $ 3T by the end of 2024, from $ 8.93T today.” wrote the US chief economist Joseph Brusuelas in RSM in a note.

The labor market is still tight

The latest JOLTs survey for March showed that the opening rose to an unexpected all-time high of 11.55 million, while the closing frequency also rose. Powell has hoped for some slack in the labor market, which will give the FOMC some more maneuverability in line with the tightening.

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