Catalyst/Rational Instant Reaction: Fed Raises Rates 50 Bps; Takes 75 bp Hike Off Table for June

Fed Raises Rates 50 Bps; Takes 75 bp Hike Off Table for June

Please see below for insights from the Catalyst and Rational investment teams for an initial reaction to today’s 50 bps rate hike from the Federal Reserve and the subsequent Q&A session.

Leland Abrams of Wynkoop Financial and Portfolio Manager of an income fund

• While the Federal Reserve’s decision to hike rates 50 bps was mostly a non-event that markets had priced in, the Q&A session hosted by Chair Jay Powell was much less hawkish than markets had expected, as a 75 bps hike is now off the table for June.
• Markets can now expect two more 50 basis point hikes with a chance for a pause in September (depending on the data).
• The Federal Reserve realizes the supply side is out of their hands, and they’re looking for progress in core inflation readings but haven’t set a specific target.
• In response, stocks are up and yields are lower. The yield curve is steeper, with the front end and belly of the curve rallying the most – coinciding with an anticipated soft landing. Mortgage basis are much tighter.

Simon Lack of SL Advisors and Portfolio Manager of an energy infrastructure fund

• Chair Powell’s comment that they had not considered a 0.75% hike caused bond yields to drop and drove the stock market’s strong subsequent performance.
• We continue to think that this is a dovish Fed trying to make up for previously mis-reading inflation. They estimate “neutral” as a 2-3% Fed Funds rate. A pause at that point would make sense.
• Energy stocks were already strong because of the EU’s decision to stop imports of Russian oil by year’s end. Ten-year TIPs yields dropped, reflecting a modest increase in inflation expectations which further buoyed energy

Daniel Rudnitsky of SMH Advisors and Portfolio Manager of an income fund

• As the FOMC voted unanimously to increase the benchmark rate by a half percentage point, it also will begin allowing its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion.
• Most interesting to the markets was the fact that Fed Chairman Powell said that hikes of 75 basis points aren’t something officials are actively considering. The dollar and shorter-term Treasury rates fell, steepening yield curves.