Live Data Coverage: June Federal Reserve Meeting, Rate Decision

June FOMC Preview:

• Rates markets are fully pricing in a 75-bps rate hike by the Federal Reserve today.
• Rate hike expectations have ratcheted higher since the May US inflation rate report (CPI) on Friday; the US Treasury 2-year yield has seen its fastest climb since 2008.
• We’ll discuss how markets may react to the June Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT on Wednesday, June 15, 2022. You can join live by watching the stream at the top of this note.

50-bps or 75-bps in June?

The tone deployed by Fed policymakers between the May and June FOMC meetings doesn’t match the reality of what’s played out in rates markets in recent days. The fact of the matter is that the arrival of the May US inflation rate report (CPI) last week fundamentally changed perception around what the Fed will do today.

After a new multi-decade high in US inflation rates, markets have once again dragged forward expectations for a rapid pace of rate hikes over the coming months. We can measure whether a Fed rate hike is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Chart 1 below showcases the difference in borrowing costs – the spread – for the June 2022 and December 2022 contracts, in order to gauge where interest rates are headed by December 2022.

Eurodollar Futures Contract Spread (June 2022-December 2022) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Daily Timeframe (January 2021 to June 2022) (Chart 1)

Rate Hike Timeline

After the Fed raises rates by 75-bps in June, there are seven 25-bps rate hikes discounted through the end of 2022 thereafter. 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.

• June 2022 = 75-bps rate hike (100% chance)
• July 2022 = 75-bps rate hike (91% chance)
• September 2022 = 50-bps rate hike (126% chance)
• November 2022 = 50-bps rate hike (117% chance)

We’ll discuss how markets may react to the June 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.

--- Written by Christopher Vecchio, CFA, Senior Strategist