Fed Expected to Deliver Another 75bps Rate Hike Today

  • Treasury yields are mostly unchanged this morning as the market awaits the afternoon rate decision by the FOMC. The 10yr Treasury is yielding 4.04% while the 2yr is currently yielding 4.54%. Let’s check back on that after this afternoon’s events.


  • The big event of the week is here with the FOMC expected to deliver a 75bps hike, bringing the fed funds range to 3.75% – 4.00%. The bigger question for today’s meeting is whether Chair Powell will signal any softening in the upcoming pace and/or magnitude of hikes.


  • We still believe Powell will stick to his hawkish guns and provide little hope that a softening is coming, at least for now. This is especially so after the latest JOLTs job opening numbers, ADP Employment Report (more on that below) and a slightly better-than-expected ISM Manufacturing Survey. Also arguing for a continued hawkish tone is the fact that the December meeting will come after two more CPI and job reports, so the Fed will have a much better idea how the direction of inflation and the labor market is trending.


  • That means those expecting some softening in rhetoric are likely to be disappointed, especially the equity crowd that has been waiting/expecting a dovish pivot for some time. That doesn’t mean the fixed income market will be immune. A resolutely hawkish Powell will probably mean a bit more selling in the short end which could push the 2yr – 10yr Treasury inversion to a new cycle high. The current spread is -50bps with -58bps sitting as the cycle high.


  • As mentioned above, the latest ADP Employment Report came in stronger-than-expected this morning with and that could be another reason for Powell to remain hawkish. ADP reported 239 thousand new private sector jobs vs. 185 thousand expected and 192 thousand jobs in September. The gains were driven by the leisure and hospitality sector with 210 thousand new jobs while manufacturing saw job losses totaling 10 thousand. The Friday BLS Employment Report is expected to show 196 thousand new jobs with 200 thousand in the private sector.


  • The ADP Report adds further evidence, in addition to the JOLTS report, that the labor market remains resilient in the face of several 75bps rate hikes. Keep in mind, however, that the jobs market is a lagging indicator, but the latest numbers still show little in the way of marked slowing. Again, that should embolden Powell to continue with the hawkish tone.  As shown below, the latest market expectations for rate hikes have the funds rate peaking at 5.00% at the March 22, 2023, meeting. We’ll see if that changes after today’s press conference.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.37 5.36 5.33 5.35 5.38 5.84
0.50 5.35 5.33 5.27 5.23 5.24 5.73
1.00 5.35 5.30 5.23 5.19 5.15 5.60
2.00 5.29 5.18 5.11 5.03 NA
3.00 5.07 4.97 NA
4.00 4.92 NA
5.00 4.89 NA
10.00 NA

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Published: 11/02/22 Author: Thomas R. Fitzgerald