FOMC - Two More Hikes?

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For the first time in 15 months, the Fed did not hike rates today. And the vote was unanimous. That’s the good news.

The bad news is that the dot plot suggests not one, but two, more hikes this year. That’s right, SOFR up to 5.75%. One member forecasts Fed Funds > 6% by year end. Powell said, “Nearly all members view it as likely that more hikes will be needed.” Rates to the moon, right?

The 2 Year Treasury initially spiked 22bps in the moments after the statement was released. Within 30 minutes, however, it was all the way back down to 3bps.

What gives?

1. The market’s not buying what the Fed is selling. If the Fed really felt like two more hikes were needed, why not hike today?
2. Powell may have made some backroom deals to keep the vote unanimous. “If you agree to vote on a pause, I am ok with you ramping up the number of hikes in the future.” Even if he has no intent to hike, this keeps up the appearances of a unified front.
3. A hawkish tone keeps a lid on inflation expectations. 

Powell stressed several times that July is a live meeting for a hike. Whether you think the Fed will actually hike again is largely dependent on whether you believe more hikes are needed (because you like being wrong) or if you think the data is slowing already (because you have eyes).

Powell refused to commit to a July hike. He could have said something like, “We expect more tightening will be necessary, but at a slower pace.” But he didn’t.

Markets have a 62% probability of a hike in July, which I think is too high. I think today was a classic kick the can down the road while keeping a lid on expectations. Powell bought himself some time to see how things progress in the next month.

But the market is starting to realize the Fed won’t be cutting this year. Powell said cuts are “about a couple of years out”. I also disagree with that, but he needs to say that to push out the first cut to 2024.

As of this writing, the 2T is up 7bps and the 10T is flat.