OPINION
Market Rating Before FOMC MeetingJan 31
Federal Reserve Board Members want 50-basis point rate hike
Although the Fed made a 25 basis point rate hike at its meeting on March 15-16, in line with market forecasts, forecasts that the Ukrainian crisis will also contribute to the current high inflation are putting pressure on the Federal Open Market Committee (FOMC) for an aggressive tightening.
At this point, it is very important from the point of view of market forecasts that the leading members of the Fed begin to take a hawkish view. In the Economic Projections Report published by the Fed for the March meeting, the Committee members informed that they expect another 6 rate hikes of 25 basis points by the end of the year in order to prevent personal consumption expenditures price index from becoming permanent, and that the balance sheet would start to be reduced at one of the next meetings. FOMC statement had indicated that the invasion of Ukraine by Russia is causing tremendous human and economic hardship. And 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, according to the FOMC members.
According to US Department of Labor data, consumer inflation (CPI) increased by 0.8 percent in February compared to the previous month and increased by 7.9 percent year-over-year to the highest level since 1982. Known as the representative of the hawkish side of the FOMC, St. Louis Fed President James Bullard said that a 50 basis point rate hike and a balance sheet reduction is a more appropriate policy for inflation and supports raising the federal funds rate above the 3 percent level by the end of the year, pointing out that the US economy can handle a larger tightening.
On the other side, Minneapolis Fed President, Neel Kashkari noted that inflation is much higher than the desired amount and added that he was in favor of starting to shrink the balance sheet at May meeting in order to bring supply and demand back into balance. And Board of Governors member Christopher Waller also stated that the announced data should move with an increase of 50 basis points and geopolitical risks should be taken into account in this direction. The speech of Fed Chair Jerome Powell at 16:00 (GMT+2) today will also be closely followed from this point of view.
Although it is not yet widely spread in market pricing, 50-basis points rate hike is mentioned by many members and it may be in favor of the dollar index. In other words, the interest rate yield will reach positive zone in the near term and US dollar will separate from the developed market currencies and put pressure on them.
In addition, Russia's bond coupon payments to investors had eased the tensions in the bond markets; however, this relief may not be permanent due to the 50-bps rate hike forecasts. Although US10Y declined to ~2.14 percent from the 2.5-year peak of 2.24 percent, it may target 2.5 percent as long as it stays above 2 percent line.
At this point, it is very important from the point of view of market forecasts that the leading members of the Fed begin to take a hawkish view. In the Economic Projections Report published by the Fed for the March meeting, the Committee members informed that they expect another 6 rate hikes of 25 basis points by the end of the year in order to prevent personal consumption expenditures price index from becoming permanent, and that the balance sheet would start to be reduced at one of the next meetings. FOMC statement had indicated that the invasion of Ukraine by Russia is causing tremendous human and economic hardship. And 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, according to the FOMC members.
According to US Department of Labor data, consumer inflation (CPI) increased by 0.8 percent in February compared to the previous month and increased by 7.9 percent year-over-year to the highest level since 1982. Known as the representative of the hawkish side of the FOMC, St. Louis Fed President James Bullard said that a 50 basis point rate hike and a balance sheet reduction is a more appropriate policy for inflation and supports raising the federal funds rate above the 3 percent level by the end of the year, pointing out that the US economy can handle a larger tightening.
On the other side, Minneapolis Fed President, Neel Kashkari noted that inflation is much higher than the desired amount and added that he was in favor of starting to shrink the balance sheet at May meeting in order to bring supply and demand back into balance. And Board of Governors member Christopher Waller also stated that the announced data should move with an increase of 50 basis points and geopolitical risks should be taken into account in this direction. The speech of Fed Chair Jerome Powell at 16:00 (GMT+2) today will also be closely followed from this point of view.
Although it is not yet widely spread in market pricing, 50-basis points rate hike is mentioned by many members and it may be in favor of the dollar index. In other words, the interest rate yield will reach positive zone in the near term and US dollar will separate from the developed market currencies and put pressure on them.
In addition, Russia's bond coupon payments to investors had eased the tensions in the bond markets; however, this relief may not be permanent due to the 50-bps rate hike forecasts. Although US10Y declined to ~2.14 percent from the 2.5-year peak of 2.24 percent, it may target 2.5 percent as long as it stays above 2 percent line.
