The regulator will unveil its decision tonight following the two-day policy meeting. Let's try to figure out whether the regulator might take more aggressive policy moves in the future? The Federal Reserve is widely expected to increase the federal funds rate by 50 basis points for the firsttime since May 2000.
Experts say that the central bank will follow the same pace of monetary tightening at each of the next 3 meetings. At least, swap traders are pricing in half a percentage point in June, July, and September. This agenda will be the most aggressive in the last 3 decades. However, we should not rule out the scenario that the US Fed will resort to more aggressive measures in the future.
The rhetoric will be cleared up tonight. Market sentiment will depend on whether ChairmanJerome Powell will come up with hawkish or dovish statements at the press conference. Under the conditions of accelerating inflation, Jerome Powell will not avoid the question of a sharper rate hike by 75 basis points. The last time when the regulator raised interest rates by 75 basis points was in 1994. US Treasuries went through a nightmare at that time.
Recently, Federal Reserve Bank of St. Louis President and CEO James Bullard spoke in favor of a sharper pace of monetary tightening. Nevertheless, most of his colleagues find a rate hike of half a percentage point more appropriate for the time being.
According to Fed Funds futures or the FedWatch Tool by CME group, the probability of a rate hike by 75 basis points is currently assessed at slightly above 30%. The thing is that we should not downplay this scenario. Indeed, in the last 6 months, market participants have been caught off-guard by unexpectedly hawkish comments by Fed policymakers.
Besides, we should bear in mind rising inflation expectations. At present, the US economy is facing the risk of faster inflation acceleration amid the simmering hostilities in Ukraine.
Apparently, Jerome Powell will refer to further inflation data when he is asked about the probability of raising interest rates by 75 basis points.
Analysts predict that he won't reject the idea of more aggressive tightening because he doesn'twant to sound too dovish. At the same time, the Chairman does not want to greenlight this idea too early. Most experts reckon that the Fed's leader will speak in an ambiguous tone. Such lack of clarity might trigger a rally of yields in US Treasuries of different maturity.
Let me remind you that yields of benchmark 10-year Treasuries topped 3% for the first time since 2018.
The confident growth in bond yields occurred amid a large-scale decline in government bonds in other countries. They printed the worst losses in April in the whole history.
