Market Awaits FOMC Decision and Powell’s Comments

    • It’s not so much the 50bps rate hike we expect from the Fed this afternoon, but how Powell frames expectations for the meetings to come that will be the focus for investors. That will have to come mostly in the post-meeting press conference since we won’t see refreshed economic or rate forecasts until the June meeting.
    • As we said on Monday, if recent history is any guide, expect Powell to sound more hawkish than the market expects. One reason for that is the record-breaking wage gains noted in the first quarter’s Employment Cost Index. Wage-price spirals are the last thing the Fed wants, or needs, so they will continue to press the case for 50bps hikes at each subsequent FOMC meeting until getting, at least, to the so-called neutral level around 2.50%. He may even throw out the possibility of a 75bps hike, but that isn’t likely to happen today.
    • Another indicator of the tightness in the labor market was yesterday’s Job Openings and Labor Turnover Report for March which saw another new record for job openings at 11.549 million.
    • Powell noted in the March press conference that there were 1.7 open job positions for every unemployed person. That has now increased to 1.9 open job positions (see graph below). That increase surely did not go unnoticed and will probably be mentioned by Powell this afternoon as another reason to keep the rate hikes coming.
    • Speaking of job openings, that may be the canary-in-the-coalmine in regards to an indicator signaling some easing in labor market strength as the Fed layers in more rate hikes this year. Instead of layoffs increasing, companies may acknowledge easing demand by first reducing open job positions then later turn to layoffs.
    • The other part of the Fed decision today will be the plans for balance sheet run-off. The numbers  currently being thrown around are $60 billion per month in Treasuries and $35 billion per month in MBS. With both increasing in monthly increments. Powell will certainly let the market know those numbers and whether those reductions will begin this month or in June.
    • Acting as something of an offset to those planned balance sheet reductions, the Treasury announced this morning a reduction in coupon-bearing debt for the next quarter given the unexpected strength in tax receipts, and also said it could cut issuance in the subsequent quarter as well. Treasury officials say that issuance of coupon-bearing securities across an array of maturities will fall by a total of $69 billion during the quarter through July versus the previous three months. That reduction should alleviate some pressure on prices as the Fed slowly steps away from its purchases.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.86 3.08 3.19 3.34 3.54 4.01
0.50 2.84 3.06 3.13 3.23 3.40 3.89
1.00 2.84 3.03 3.09 3.19 3.31 3.77
2.00 3.01 3.04 3.11 3.19 NA
3.00 3.06 3.13 NA
4.00 3.08 NA
5.00 3.05 NA
10.00 NA

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Published: 05/04/22 Author: Thomas R. Fitzgerald