The biggest rate hike since 1994, when the Fed’s raised rates by 75bps sparking the Tequila Crisis and an IMF bailout of Mexico is now in the history books, and while it was widely telegraphed courtesy of the WSJ’s mini -Hilsenrath, Nick Timiraous, it is still a momentous move.
Below we have collected some of the early kneejerk reactions from Wall Street strategists, analysts and economists.
Peter Boockvar, advisor at Bleakley Advisory Group: “So the Fed is embarking on the most aggressive hiking cycle in 40 years but they estimate barely any impact on the unemployment rate. As for their estimate for GDP, it went from 2.8% last time to 1.7% now and next year they also expect 1.7% growth. NO central banker will EVER estimate a recession, keep in mind.”
Neil Dutta at Renaissance Macro: “Slower growth and a more aggressive Fed is a recipe for a recession. For political leaders that have been begging the Fed to answer their constituent calls on inflation, be careful what you wished for.”
Mike Loewengart at Morgan Stanley: “Even two weeks ago we may have thought that a .75% increase was off the table, at least in the short term. But with inflation not letting up, it’s become pretty clear that the Fed needs to take a more aggressive approach. And as we entered bear territory this week, the market may have already priced in a higher-than-expected jump. That’s not to say the larger hike may spook some investors. Keep in mind that as we go through a changing monetary policy landscape, we’ll likely continue to see volatility as the market digests the new norm. Sticking to your investment strategy during waves of volatility is a solid course of action — aka don’t panic.”
Dennis DeBusschere of 22V Research: “Combined with estimates of higher u-rate, it suggests commitment to slowing growth down QUICKLY.”
Max Gokhman, CIO for AlphaTrAI: “First off, there’s clearly a crazy low-volume tug-of-war right now, but the bears are winning. I think the policy rate forecast going up to 3.4% from 1.9% at the last meeting is hawkish not just because of the move itself, but it shows how the Fed can now very quickly get even more hawkish if the data pushes it so — i.e., we can see them hike it even further at future meetings.”
Kathy Jones, Chief Fixed Income Officer at Schwab Center: “The expectation in the market is for another 75 basis points at the July meeting and perhaps slowing down a bit in September, but I think that while Powell may indicate that that’s the plan, I think he’ll also try to leave things somewhat open-ended.”
Rich Miller, Fed-watcher at Bloomberg: Observes that this language from the May policy statement has been removed for today’s: “With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.”
Anna Wong, chief economist at Bloomberg: “The FOMC’s supersized hike, coming even as the economy shows signs of cooling, reflects the Fed’s alarm over the recent rise in inflation expectations. Chair Jerome Powell is determined not to repeat the mistakes of Arthur Burns, who led the central bank during the wage-price spiral of the 1970s. With the largest rate move at a single meeting since 1994 — and a signal of more tightening to come — Bloomberg Economics believes the behind-the-curve Fed has put itself in position to catch up quickly…. The forecast in the latest SEP is more realistic than in the past few summaries, suggesting that officials have moved away from an ‘immaculate disinflation’ view of the world in which price pressures resolve themselves. Officials now appear to acknowledge that inflation is a real problem, and they are increasingly recognizing and accepting the costs that will come with tighter monetary policy.”
Jordan Jackson, global market strategist at JPMorgan asset management: “I’m sort of befuddled in the sense that they’ve ratcheted lower their GDP projections for this year and next year, they’ve increased their unemployment rate projections by four tenths of a percent over 2023, yet they’re massively increasingly how much they’re looking to lift rates.”
Childe-Freeman, chief G-10 FX strategist for BI: “The Fed backdrop remains compellingly supportive for the dollar at this stage of the cycle, and this could extend for as long as rate increases are delivered in a positive growth context. At some point, though, recession concerns could become more of an FX driver and leave the dollar exposed. We’re just not there yet.”
Mohamed El-Erian, advisor at Allianz: “The Fed has significantly moved higher its interest rate path while also front-loading it a lot. Unusually, it simultaneously revised down its growth projections in a notable manner. Consistent with a stagflationary baseline, a fatter recession left tail, and a thinner right tail.“
Ira Jersey of Bloomberg Intelligence: “We still think the yield curve will invert more similar to the 1990s experience than during the last two cycles, when the 2-year/10-year curve only inverted modestly. A more aggressive Fed hiking cycle and slowing economic backdrop should keep a flattening bias in the market for now.… I think it’s more important to think about the terminal rate at this point and look past some of the intraday volatility. Even with a 75-bp move, the question now becomes ‘Will the policy rate peak where the market is pricing, or higher?’ If higher, the yield curve may flatten a lot more. If not, then bull-steepening could ensue, but I don’t think that’s likely yet.”
Jerome Powell: “The labor market is extremely tight and inflation is much too high.”