05 May 2022

YESTERDAY'S DAILYFX

Intro: May Federal Reserve Meeting, Rate Decision
Christopher Vecchio, CFA, Senior Strategist
 
 

Fed Rate Hike Cycle Set to Accelerate

There was been a discernible shift in tone among Fed policymakers since the start of April. Whereas most officials believed that a 25-bps rate hike would be appropriate in May, recent inflation data spurred a more hawkish shift in rhetoric, with several FOMC members openly advocating for a 50-bps rate hike – and one has even talked up the possibility of a 75-bps rate hike.

After the Fed raises rates by 50-bps in May, there are still 200-bps rate hikes discounted into early-2023. The 2s5s10s butterfly has traded sideways in recent weeks, suggesting that the market has retained its overall hawkish interpretation of the near-term path of Fed rate hikes. Focus remains more on the Fed and less on Russia’s invasion of Ukraine

Rate Hike Timeline

Fed fund futures have remained very aggressive in recent weeks, with a rapid pace of tightening expected over the next three meetings.

 

 

Traders see a 100% chance of a 50-bps rate hike in each of May, June and July, with the main Fed rate expected to rise to 2.75% (currently 0.50%) by the end of 2022.

  • May 2022 = balance sheet winddown announced; 50-bps rate hike (107% chance)
  • June 2022 = 50-bps rate hike (142% chance)
  • July 2022 = 50-bps rate hike (133% chance)
  • September 2022 = 50-bps rate hike (90% chance)

We’ll discuss how markets may react to the May Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note

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