FOMC Hikes by 50bp; Balance Sheet Roll-off to Begin in June

The Federal Reserve hiked its policy rate by 50bp, as expected by market participants, bringing the fed funds target range to 0.75%-1%. This was its largest single rate hike in over two decades. The move comes on the back of inflation hitting 40Y highs, at 8.5% YoY in March. Current market pricing expects the fed funds range between 2.75%-3% by year end. Regarding the quantum of further rate hikes, Fed Chairman Jerome Powell said, “Seventy-five basis points is not something the committee is actively considering” and that 50bp hikes “should be on the table at the next couple of meetings”.  In addition, the Fed also decided to begin reducing its holdings of its balance sheet Treasury securities and agency debt and agency mortgage-backed securities (MBS) on June 1. Starting in June, $30bn of Treasuries and $17.5bn of MBS roll-off. After three months, the cap will increase to $60bn and $35bn for Treasuries and MBS respectively.

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