Thread by @RickRieder

As was widely expected, the @federalreserve’s Federal Open Market Committee raised the target range for the Federal Funds #policy rate by 50 basis points (bps), to between 0.75% and 1.0%, and announced the start of #runoff of the central bank’s balance sheet.

As previously suggested by the #Fed’s March minutes, the pace of runoff was confirmed today as $95 billion/month ($60 billion in U.S. #Treasuries and $35 billion in Agency #MBS, with a three-month phase-in period.

Also as expected, the statement reiterated that the #FOMC “anticipates that ongoing increases in the target range will be appropriate,” underscoring the seriousness of #Fed policymakers in getting #inflation and inflation expectations under control.

It is very clear that #inflation is the issue weighing on CEOs, CFOs, CIOs and virtually all #market participants’ minds today and this emphasis is what we heard from the #Fed.

In all #policy moves, there are negative consequences, which hopefully are muted, and are less impactful than the issue that is being addressed and today that issue is inflation.

The consequences we risk in policy #tightening are potential #recession, potential lost jobs and #wages, and clearly tighter #FinancialConditions that will weigh on virtually all financial #markets.

The anticipation of these moves have been very apparent so far this year, and in a dramatic way over the past month, or so, in market action. In fact, the weight on #financial conditions hasn’t been this evident in 40 years, or so, particularly in such dramatic and rapid fashion.

The first quarter of the year was rough for both #stock and #bond returns, with the U.S. Agg Index being down -3.79% in April and the Long Agg Index, and the long Corporate portion of the #Agg down -9.29% and -9.77 %, respectively (as of May 3).

Further, the $SPX Index was down -8.80% in April and -12.39% year-to-date (May 3), but still the #Fed’s message has been very clear about #financial conditions as one of the tools to bring down #inflation, which is running dramatically ahead of the central bank’s comfort level.

In our view and reinforced by #ChairPowell’s comments in the press conference today, the path forward for #Fed rate hikes is fairly certain for the next few quarters (the attempt to reach a neutral policy stance), and it is well priced by #markets.

In fact, it’s pretty clear that the valuations of front-end #rates markets have embedded some #hawkish risk premium already to deal with #inflation.

In contrast, though, the path forward for both global and domestic #liquidity is highly uncertain, influencing financing #markets as financial conditions have tightened dramatically, and volatility markets exploded higher alongside of some very uncertain outcomes.

Today’s policy dynamic has led many commentators to suggest that the likelihood of an #economic #recession in the U.S. has increased pretty drastically, but while this possibility bears watching, we think it’s currently overdone.

Without question, the U.S. #economy is slowing, but its backbone (U.S. households) are in historically strong #financial shape. In fact, if one looks to real #income growth and the household #debt service ratio, the measures appear to be at their most favorable levels in years.

There are many factors out of the #Fed’s control (supply chain disruptions and #geopolitics), but we’ll be watching closely to see how the Fed’s #tightening of financial conditions impacts the broad #economy and employment levels…

…which are very firm today but can clearly soften alongside of aggressive inflation-fighting #MonetaryPolicy.