Instant Fed Reaction – Fed Raises Rates 25 bps; Pause Ahead?

Following the Federal Open Market Committee’s decision to raise interest rates 25 bps this afternoon, Leland Abrams, portfolio manager of a fixed income fund, provided his initial market insights.

As expected, the Fed raised rates by 25 bps to a new target of 5 – 5.25%.  Importantly, their language regarding “some ongoing hikes may be necessary” was removed.  We view this as an underscore for a pause in June.

The Q&A session is typically where the market action happens, but today was a bit subdued.  I think Chair Powell did a good job preventing a huge rally by being coy and evading the notion that they will definitely pause rate hikes in June.

In our opinion, the key takeaway was almost no reference to the non-housing related services inflation (something they have been obsessing over recently), recognition that inflation has come down substantially and will continue (Powell even pointed out that 1 year inflation is around 3% currently, giving us 2% positive real rates), recognition of cooling in the labor markets, and the fact that they will now be very focused on tightening credit conditions from banks.  The new, seemingly most important focus on credit conditions is what I believe to be profound, and this is why treasuries are rallying.

As I write this in the immediate hours after the announcement, the front end of the curve (2s, 3s, 5s) has rallied approximately 10 bps to lower yields), and Fed fund futures are pricing almost no chance of a June hike and a 4.1% rate in January 2024.