May FOMC Preview:
- Rates markets are fully pricing in a 50-bps rate hike by the Federal Reserve today.
- Rates markets have completely shrugged off any 'dovish' impact from the Russian invasion of Ukraine.
- We’ll discuss how markets may react to the May Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT on Wednesday, May 4, 2022. You can join live by watching the stream at the top of this note.
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.
EURODOLLAR FUTURES CONTRACT SPREAD (MARCH 2022-DECEMBER 2023) [BLUE], US 2S5S10S BUTTERFLY [ORANGE], DXY INDEX [RED]: DAILY CHART (May 2021 TO May 2022) (CHART 1)
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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--- Written by Christopher Vecchio, CFA, Senior Strategist
