The market is preparing for an aggressive FOMC meeting.
By Althea Spinozzi, Senior Fixed Income Strategist, Saxo Bank
2022-03-14 14:15
The Federal Reserve is well behind the curve in tightening monetary policy while inflation expectations continue to soar. That's why the market is positioning for a hawkish FOMC meeting this Wednesday, which might combine a rate hike with an announcement concerning the runoff of the Fed’s balance sheet or an aggressive dot plot.
Several central banks are meeting this week for their monetary policy decision. Yet, the big event everybody is waiting for comes on Wednesday, when the FOMC meeting will decide to hike interest rates for the first time since before the Covid pandemic. Before commenting on markets and what to expect on Wednesday, I believe it is crucial to consider last week’s events as they provide a critical framework for what might happen next.
Anything is possible during Wednesday's FOMC meeting, given the recent hawkish twist of the ECB. Jerome Powell recently said that he's going to vote for a 25bps rate hike at this meeting, but he doesn't exclude a 50bps rate hike in the future, if necessary.
Today, the market is positioning for a much more aggressive Federal Reserve meeting as inflation expectations continue to soar. Nominal yields are also rising, with the 10-year yields breaking above 2.10% for the first time since July 2019. It seems that the market is preparing for an escalation of the ECB meeting. The Federal Reserve will focus merely on inflation from now on, leaving concerns regarding a slowdown in growth to fiscal policies.
A 25bps rate hike might not be enough if that were the message. Fed officials might want to combine their rate hike with an aggressive dot plot or an announcement surrounding the Fed's balance sheet's runoff (or both). Either way, volatility might increase dramatically. This week, the market lacks the life support provided by purchases under the Fed's QE program, which ended last week.
The FOMC meeting will surely make the headlines this week. However, it's critical to continue to look for news from the primary corporate bond market. Syndication desks are looking to issue $30 billion worth of high-grade bonds ahead of the Fed meeting. In contrast, the junk bond primary market remains choppy. If volatility further restricts bonds issuance, that would indicate that we are approaching tantrum levels.
