- Federal Open Market Committee (FOMC) meeting and statement: On 15 June, the Fed hiked the Fed funds rate by 75bp, to 1.50-1.75%, the first 75bp rate rise since November 1994. Chair Jerome Powell confirmed that recent readings regarding consumer inflation and inflation expectations caused committee members to realise a 75bp hike was necessary. The statement was hawkish. The Fed stated that the Committee is strongly committed to returning inflation to the 2% goal, signifying it is not afraid to be hawkish until inflation falls.
- Press conference: Chair Powell remained hawkish as he described the Fed’s focus on bringing down inflation. He was careful not to dismiss the possibility of a 100bp rate hike and reiterated the Fed remained data-dependent. While he tried to keep a hawkish tone, we are concerned his message may have gotten lost. He stated the 75bp rate hike is unlikely to become regular policy. He flagged that the Fed will decide on a hike of between 50 and 75bp at the July FOMC.
- Market reaction and investment implications: After Powell left open the possibility of a 50bp rate hike in July rather than reaffirming another 75bp rate hike, the bond market rallied and the yield curve steepened. Equity markets rallied strongly. The dollar was sharply weaker across the board. Despite an understandable relief rally, it is likely too early to signal the all-clear for risky assets. The key market takeaways from the FOMC is that the Fed is highly focused on bringing down inflation and may be less worried about market reaction and volatility. As such, we maintain a cautious investment bias, given that the outlook for monetary policy and its impact on inflation and the economy remain both fluid and uncertain. The likelihood of the Fed achieving a soft landing is declining. This calls for a cautious and selective stance on corporate credit, with a focus on quality and liquidity. On duration, we have recently moved towards a neutral stance. We believe that US bonds can act as portfolio risk diversifiers in a phase of slowing growth amid more attractive valuations on the US yield curve.
On 15 June, the Fed hiked the Fed funds rate by 75bp, to 1.50-1.75%, the first 75bp rate hike since November 1994. The Fed rate hike was widely expected after earlier this week, various news agencies reported the possibility of such a move in response to last week’s strong consumer inflation and expectations data. To that point, it was quite clear in the FOMC statement, the Summary of Economic Projections (SEP), and the press conference that the Fed’s singular focus is inflation. Chair Jerome Powell confirmed that recent readings on consumer inflation and inflation expectations caused the Committee to realise that a 75bp hike was necessary. The meeting’s statement and accompanying SEP offered some hawkish surprises. The statement signaled the continuation of a series of rate hikes in the coming meetings. Within the SEP, the median rate for the Fed funds rate by year-end 2022 increased from March’s projection of 1.9% to 3.4%, well above the Fed’s estimate of the neutral rate (2.5%) and taking the policy rate into ‘restrictive territory’. Although investors initially reacted to the hawkish FOMC statement by buying the dollar and selling Treasuries and equities, sentiment reversed quickly during Chair Powell’s press conference, where he reinforced that the Fed is not on a preset course to raise the funds rate by another 75bp at July’s FOMC meeting, but rather remains data-dependent regarding the path of future policy rate adjustments.