Response to the FOMC - dots shift rate hike expectations forward
Earlier responses can be found here in the US market wrap from Wednesday following the Federal Open Market Committee meeting and Powell's press conference:
Bank of Montreal response to the day:
- The market's response to the FOMC statement and updated projections was a carbon copy of what followed the June meeting. Specifically, the dots indicated a willingness to hike rates sooner than previously assumed and the Treasury market responded with a bull flattener (5s/30s).
- This logic is relatively straightforward; a Committee that's compelled to bring forward rate hikes in response to higher realized inflation is very consistent with the official operating procedure under the prior framework.
- There is also the implied question of the Fed's commitment to allowing inflation to run hotter during this cycle than in previous occurrences - the market is clearly trading as if the Fed will ultimately liftoff sooner than believed as recently as the start of this year and in doing so undermine the prospects for self-perpetuating reflation and a higher growth plateau.
And this, in summary, via Westpac. On taper timing:
- The decision between November and December will be determined by the strength of the September and October jobs reports. Regarding the pace of the taper process, he repeatedly looked to the middle of 2022 as a likely endpoint, giving a 6-8 month timeline (in line with our January to June 2022 expectation).
- On this path to policy normalisation, two facts need to be recognised: (1) the FOMC do not expect to act pre-emptively or aggressively; and (2) at the end of 2024, the stance of monetary policy is still best characterised as accommodative.