FOMC: Extra 50 bps in the pipeline – UOB

Senior Economist Alvin Liew and Rates Strategist Victor Yong at UOB Group review the latest FOMC event (May 4).

Key Takeaways

“The 3/4 May 2022 FOMC as widely expected, continued it rate hiking cycle by lifting the policy Fed Funds Target rate (FFTR) by 50bps to 0.75-1.00%, the biggest hike since 2000, and importantly, it signaled clearly that more rate hikes will follow with its focus on reining in inflation as it ‘anticipates that ongoing increases in the target range will be appropriate’. Unlike the Mar FOMC, the decision this time was unanimous (9-0).”

“The other key element was the release of the plans for the Balance Sheet Reduction [BSR] also termed as Quantitative Tightening, [QT] which will start on 1 Jun 2022, just three months after it concluded its Quantitative Easing (QE) in Mar 2022. The timeline is much more accelerated when compared to the previous episode in 2017-2019.”

“Even as FOMC Chair Powell confirmed that the Fed is ‘on a path to move policy rate expeditiously to more normal levels…Additional 50 bps increases should be on table at next couple of meetings’, he dismissed speculation that the Fed was contemplating an even larger increase of 75bps hike in the months ahead, saying that it is ‘not something that the committee is actively considering’.”

“Given the clear indications for on-going hikes to combat inflation spelt out in the May FOMC and Powell’s explicit comment that ‘additional 50 bps increases should be on table at next couple of meetings’, we now expect the FFTR will be hiked faster by 50bps in the June and July FOMC (from our previous forecast of 25bps).”

“We continue to expect 25bps in every remaining meeting of this year. Including the Mar FOMC’s 25bps hike and yesterday’s 50bps hike, this upgrade now implies a cumulative 250bps of increases in 2022, bringing the FFTR higher to the range of 2.50-2.75% by end of 2022 (from our previous forecast of 200bps hikes to 2.00-2.25% by end 2022). We maintain our forecast for two 25bps rate hikes in 2023, bringing our terminal FFTR to 3.00-3.25% by mid-2023 (versus previous forecast of 2.50-2.75%).”