The market is betting on a 50bps hike today by the Fed, with only a tiny outlier of 2% expecting 75bps. The core PCE reading of 5.2%, the higher than anticipated employment cost index, and tight labour conditions will trump the disappointing GDP contraction of -1.4% q/q (+1.1% q/q forecast).
We note that the federal funds rate is behind the market, as per the US 2 year note, by approximately 245 bps (red vertical line labelled " yield gap"). Thus, it is no surprise that the Fed is looking to frontload its rate hiking cycle, with 75bps a distinct, albeit aggressive, possibility in June and July.
The Fed is also likely to give the market more information regarding its quantitative tightening programme. Previous minutes suggested the Fed would sell $60bn worth of Treasury securities and around $35bn in agency mortgage-backed securities per month. This balance sheet reduction is likely to be phased in over three months.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.