The biggest rate hike since 1994, when the Fed's raised rates by 75bps sparking the Tequila Crisis and an IMF bailout of Mexico is now in the history books, and while it was widely telegraphed courtesy of the WSJ's mini -Hilsenrath, Nick Timiraous, it is still a momentous move.
Below we have collected some of the early kneejerk reactions from Wall Street strategists, analysts and economists.
Peter Boockvar, advisor at Bleakley Advisory Group: “So the Fed is embarking on the most aggressive hiking cycle in 40 years but they estimate barely any impact on the unemployment rate. As for their estimate for GDP, it went from 2.8% last time to 1.7% now and next year they also expect 1.7% growth. NO central banker will EVER estimate a recession, keep in mind.”
Neil Dutta at Renaissance Macro: “Slower growth and a more aggressive Fed is a recipe for a recession. For political leaders that have been begging the Fed to answer their constituent calls on inflation, be careful what you wished for.”
Mike Loewengart at Morgan Stanley: “Even two weeks ago we may have thought that a .75% increase was off the table, at least in the short term. But with inflation not letting up, it’s become pretty clear that the Fed needs to take a more aggressive approach. And as we entered bear territory this week, the market may have already priced in a higher-than-expected jump. That’s not to say the larger hike may spook some investors. Keep in mind that as we go through a changing monetary policy landscape, we’ll likely continue to see volatility as the market digests the new norm. Sticking to your investment strategy during waves of volatility is a solid course of action — aka don’t panic.”
Dennis DeBusschere of 22V Research: “We need to stop confusing ‘dovish’ with what got priced because of leaks before the meeting. A bounce because things got priced is not dovish. Just oversold conditions adjusting.... Combined with estimates of higher u-rate, it suggests commitment to slowing growth down QUICKLY.”
Max Gokhman, CIO for AlphaTrAI: “First off, there’s clearly a crazy low-volume tug-of-war right now, but the bears are winning. I think the policy rate forecast going up to 3.4% from 1.9% at the last meeting is hawkish not just because of the move itself, but it shows how the Fed can now very quickly get even more hawkish if the data pushes it so -- i.e., we can see them hike it even further at future meetings.”
Kathy Jones, Chief Fixed Income Officer at Schwab Center: “The expectation in the market is for another 75 basis points at the July meeting and perhaps slowing down a bit in September, but I think that while Powell may indicate that that’s the plan, I think he’ll also try to leave things somewhat open-ended.”
Frances Donald, global head of macro strategy at Manulife Asset Management: “The crux of today is that the Fed is catching up to market thoughts: front-loaded hiking leading to a rise in unemployment, followed by cuts in 2024. The Fed is happy to hike into weakness -- which risks recession -- and will subsequently cut rates. The Fed’s outlook is gentler and smoother than what is likely to happen as the 0.4 increase in the unemployment rate is likely too complacent about the risks to the other side of the Fed’s mandate. We expect the easing cycle to be needed and enacted in 2023, not 2024.”
Tim Holland, chief investment officer at Orion Advisor Solutions: “The market will take great comfort in the Fed affirming – through word and action – its inflation-fighting credentials. We also think the market will find the Fed’s lowering of its expectations for the economy this year as quite credible and appropriate. Those are all positives, in our opinion. The risk with a 75bps move in June, and the possibility of another one at the July meeting, is the Fed does indeed go too far, too fast, putting the economy at risk of recession.”
Anna Wong, chief economist at Bloomberg: "The FOMC’s supersized hike, coming even as the economy shows signs of cooling, reflects the Fed’s alarm over the recent rise in inflation expectations. Chair Jerome Powell is determined not to repeat the mistakes of Arthur Burns, who led the central bank during the wage-price spiral of the 1970s. With the largest rate move at a single meeting since 1994 -- and a signal of more tightening to come -- Bloomberg Economics believes the behind-the-curve Fed has put itself in position to catch up quickly.... The forecast in the latest SEP is more realistic than in the past few summaries, suggesting that officials have moved away from an ‘immaculate disinflation’ view of the world in which price pressures resolve themselves. Officials now appear to acknowledge that inflation is a real problem, and they are increasingly recognizing and accepting the costs that will come with tighter monetary policy."
Seema Shah, chief global strategist at Principal Global Investors: “There was an outsize fear about a 100 bps hike, while the 75 bps was fully priced in. So today’s decision doesn’t deliver a negative surprise -- that happened on Monday,” she said. “Once the data starts to roll over with greater speed, renewed equity market declines are likely while credit markets are almost certain to face greater pain. Whichever you look at it, it’s equity market pain today or pain tomorrow.”
Jordan Jackson, global market strategist at JPMorgan asset management: “I’m sort of befuddled in the sense that they’ve ratcheted lower their GDP projections for this year and next year, they’ve increased their unemployment rate projections by four tenths of a percent over 2023, yet they’re massively increasingly how much they’re looking to lift rates.”
Childe-Freeman, chief G-10 FX strategist for BI: “The Fed backdrop remains compellingly supportive for the dollar at this stage of the cycle, and this could extend for as long as rate increases are delivered in a positive growth context. At some point, though, recession concerns could become more of an FX driver and leave the dollar exposed. We’re just not there yet.”
Tim Courtney, chief investment officer at Exencial Wealth Advisors: “The market hasn’t been liking what the Fed has been doing. There’s an argument to be made to just go even higher. Maybe we were even thinking what it would be like if they increase it by 1%. It almost seems that we are better off with bigger bolder moves rather than having this dribble out through time.”
Eric Theoret, global macro strategist at Manulife Investment Management: “The idea that the Fed is embarking on a series of 75 basis point hikes is much more painful for markets than a 75 one-and-done followed by a series of 50 basis point hikes and perhaps even moderation thereafter,” he said. “The idea that this is the only 75 basis point hike is a relief for markets fearing that there could be more.”
Mohamed El-Erian, advisor at Allianz: "The Fed has significantly moved higher its interest rate path while also front-loading it a lot. Unusually, it simultaneously revised down its growth projections in a notable manner. Consistent with a stagflationary baseline, a fatter recession left tail, and a thinner right tail."
David Rosenberg, chief economist at Rosenberg Research & Associates: “The Fed expects this to generate enough slack to bring inflation down materially next year. And the shift in the view of the labor market with a rising unemployment rate to over 4% is an implicit call for a recession.”
Ira Jersey of Bloomberg Intelligence: "We still think the yield curve will invert more similar to the 1990s experience than during the last two cycles, when the 2-year/10-year curve only inverted modestly. A more aggressive Fed hiking cycle and slowing economic backdrop should keep a flattening bias in the market for now.... I think it’s more important to think about the terminal rate at this point and look past some of the intraday volatility. Even with a 75-bp move, the question now becomes ‘Will the policy rate peak where the market is pricing, or higher?’ If higher, the yield curve may flatten a lot more. If not, then bull-steepening could ensue, but I don’t think that’s likely yet.”
Michael Shaoul, chief executive officer of Marketfield Asset Management: “That there was no mention of the lousy equity and credit market performance in the statement is also revealing, since far more modest declines have often been followed by some soothing language since the Financial Crisis. This is now an ‘Inflation First’ Committee, with Unemployment arguably the junior mandate going forwards and financial markets left to tend for themselves.”
Michael Matousek, head trader at US Global Investors: “Investors will change their strategy so that instead of buying momentum, they seek out beaten-up stocks and try to manage risk. We have lost the tailwind from the Fed, but higher rates are a necessary evil to regulate inflation. Of course the difficult thing is that the only way to lower inflation is slow down the economy, and we know investors are likely to sell risk assets ahead of a slowdown.”
Ajay Rajadhyaksha of Barclays, who first correctly called 75bps rate hike: “75bp is a strong move – a statement hike. The Fed made one. Given what we are seeing in the economy and in housing, we believe it will not need to make another. We think they it move to a 50bp hike in July."
Michael Arone, chief investment strategist at State Street Global Advisors’ U.S. SPDR business: “Not that long ago Powell suggested 75 basis points is off the table. Yet here we are. He will suggest the data has changed that’s why he had to adjust. That’s fine. But I do think that undermines the Fed’s credibility moving forward,” he said. “Now, investors need to question the reliability of that forecast and how much he will veer away from it.”
Fiona Cincotta, senior financial markets analyst at City Index: “The fact that US indices are holding on to gains, the US dollar is marginally stronger, and we haven’t seen a massive market reaction, I think what that’s telling us is there’s a good chance we are seeing the floor in US indices. I don’t think the indices will be falling much lower.”
Scott Miner, CIO at Guggenheim: "Credit spreads will likely widen as the US faces a recession... We are currently well off our maximum allocations to credit right now. If my view of the world is correct, recession means you are going to have wider credit spreads. There are cracks appearing in the credit world, and the worst is probably not over there. All risk assets are just a no-go zone. You don’t want a lot of low-quality credit at this point, you don’t want stocks, you want to really stay in the higher-end credit spectrum, and especially Treasuries, agencies, things like this that don’t have credit risk. In a recession scenario which I think we are going into none of the risk assets do well. When you look at public companies, their numbers look pretty good with cash flow coverage and everything else. But the number of private equity firms where we don’t know what that cash flow coverage is are much much more extended."
Scott Skyrm of Curvature Securities: "The Fed followed the market's advice and delivered a 75 basis point tightening. That puts the fed funds target range at 1.50%-1.75% and the RRP rate at 1.55%. Since the Fed maintained the RRP rate at 5 basis points above the bottom of the target range, there are no relative changes in overnight rates. We expect GC rates to stay soft - at least until more Balance Sheet Runoff hits the market. We expect GC within the 1.50%-1.45% for the next few weeks."
Jan Hatzius, chief economist at Goldman Sachs: "The median dot in the Summary of Economic Projections now shows a funds rate midpoint of 3.375% at end-2022—in line with our expectations and up from the 1.875% rate projected at the March meeting—which we expect will correspond to a 75bp hike at the July meeting, 50bp at September, 25bp at November, and 25bp at December. Sixteen out of eighteen participants projected a funds rate above the median longer-run dot in 2024, with the longer-run median edging back up to 2.5% (vs. 2.375% in March).
Jerome Powell: “The labor market is extremely tight and inflation is much too high.”