![]() ![]() "As long as the Fed doesn't blink, the dollar stays bid: Trade weighted measures of the dollar are going into next week's Fed meeting on their cyclical highs. We expect it to start with $50bn being allowed to run off each month before getting up to $95bn by September." "This would be a 'phased in' roll-off cap of maturing assets that could last 3+ months depending on market conditions. The minutes suggested 'participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate' versus the peak total $50bn run-off seen last time around." "Given the doubling of the size of the balance sheet since the last round of Quantitative Tightening in 2017-19, this would be done at a “faster pace” than back then. The minutes to the March FOMC meeting showed 'all participants' felt the need to announce the 'commencement of balance sheet runoff at a coming meeting'." "Pulling the trigger on Quantitative Tightening: We will also be looking for the Fed to formally announce quantitative tightening on Wednesday. We see the Fed funds rate peaking at 3% in early 2023." "For now, our base case remains that the Fed will follow up next week's 50bp hike with 50bp increases in June and July before switching to 25bp as quantitative tightening gets up to speed. We are open to the possibility, but that would probably require a decent set of consumer spending numbers over the coming months and some very solid jobs gains that contribute to further wage pressures." This has been raised as a potential course of action by St Louis Fed President James Bullard. "That said, the weakness in GDP makes it less likely that we will hear the Fed explicitly making the case for a more aggressive 75bp hike at the June or July FOMC meetings. Indeed, we don't expect inflation readings to drop meaningfully below 4% before year end." Wages are rising rapidly amid a dearth of workers and this will contribute to keeping inflation elevated through this year. "Moreover, consumer spending remained firm and the contribution from investment was solid and we expect this to continue into the second quarter. "What's priced for Fed tightening and how it stacks up against previous cycles?" "The Federal Reserve is widely expected to raise its policy rate by 50 basis points next Wednesday as 8%+ inflation and a tight labour market trump the surprise 1Q GDP contraction attributed to temporary trade and inventory challenges." ![]() We continue to see the risks skewed toward swifter, more aggressive action" The negative 1Q GDP print will be shrugged off with quantitative tightening also announced. "A 50bp ( basis point) interest rate hike from the Federal Reserve is widely expected given recent commentary from officials and the fact inflation is well above target and unemployment is just 3.6%. ![]()
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