Fed hawkishness, Powell statements… Powell and Waller statements, which emerged after the blackout process after the FOMC meeting, actually dominated the view that the 25 basis point start was insufficient in theory, and the hawkish Fed began to be more supported and priced. At this stage, there have been some changes in the phenomenon of May and June, and the combination of balance sheet reduction and concurrent rate hikes seems to occupy the markets. The Russian crisis had spoiled things ahead of the March meeting, pushing the Fed to take a smaller step, but inflation proactivity appears to be paving the way for two 50 basis points hikes by the Fed if the economy does not experience an aftershock.
Fed proactivity threshold… 50 basis point increases, the hawkish camp was the foremost support. It's important to gain weight. At the March FOMC meeting, too, Powell lined up hawkish rhetoric to signal his determination to control inflation, revealing this threshold of proactivity in his final speech. Inflation shows no signs of slowing down. Price increases in the housing market are still strong, the labor market is extremely tight, and households are very concerned about price pressures in light of recent price developments. Higher inflationary pressure is expected between constantly rising prices in energy and commodity markets.
Fed futures funds pricing… Source: Bloomberg, CME Fedwatch
Inflationary pressures… After the occupation of Ukraine, the situation regarding economic growth, supply chains and trade confidence, especially caused by inflationary pressures, has gained weight. The occupation caused commodity prices to rise even higher. Brent Crude oil reached $129 per barrel for the first time since 2008, but industrial metal prices also rose amid trade volatility and concerns over Russia's future supply. There has been unprecedented turbulence in the nickel market, which has led to the suspension of trading on the nickel contract on the London Metal Exchange (LME).
While the rise in commodity prices is itself a concern for the inflation outlook, supply constraints from both the Ukraine crisis and new lockdowns in China are adding risks to ever-increasing price pressures and stifling economic growth.
Conclusion? The real hawkishness of the Fed will come when it moves rate hikes forward. The statements made at the FOMC meeting either did not provide enough information to the market and were therefore not subject to much pricing, or the market gave a delayed reaction to this. Interest pricing has become more lively in swap markets and the rise in bond yields has gained weight. The yield curve is also entering territory on recession fears with activity on the short-term side. While it is difficult enough to achieve the 2% band in inflation targeting in the next 2 years, the work becomes impossible with the current policy ground. Therefore, the need to control inflation with monetary policy is increasing.
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