PrefBlog

TXPR closed at 558.61, down 0.61% on the day. Volume today was 1.74-million, fourth-highest of the past 21 trading days.

CPD closed at 11.105, down 0.76% on the day. Volume was 53,510, second-lowest of the past 21 trading days.

ZPR closed at 9.30, down 0.54% on the day. Volume was 198,970, above the median of the past 21 trading days.

Five-year Canada yields were up to 3.52% today.

The Fed bumped the policy rate 75bp to 3.75%:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Mohamed El-Erian comments:

As widely expected, the Federal Reserve hiked interest rates by 75 basis points.

As to what’s next: I suspect the entire focus will be on interpreting the additional language in the statement (in red).

… and the NYT commented:

While Mr. Powell said during a new conference that “at some point” it would be appropriate to slow the pace of increases, he also suggested that interest rates would peak at a higher level than the 4.6 percent that the Fed predicted in September.

He also noted that rates would “have to go higher and stay higher for a while” — a development that could make achieving a so-called “soft landing” harder.

Here’s what else to know:

The Fed acknowledged that more rate increases were coming, but also signaled that it was aware that its tightening was adding up.
…
Stocks rallied immediately after the Fed’s announcement, rebounding from losses earlier in the day, while government bond yields fell. But as Mr. Powell began answering questions from reporters, stocks fell sharply after he suggested that interest rates could peak at a level higher than what policymakers previously projected and noted that it would be “very premature” to consider a pause in rate increases. Bond yields became more mixed, with traders seemingly unsure what to make of Mr. Powell’s comments.

Mr. Powell also made clear that the bigger risk to the economy was in not acting to tame inflation, noting that if the Fed over-corrects, it has the tools to walk that back. The bigger economic risk is “if we don’t get inflation under control because we don’t tighten enough.”

And Macklem spoke to the Senate:

Inflation remains far too high, Mr. Macklem told the Senate committee on banking, commerce and the economy. At the same time, the Canadian economy is expected to “stall” in the coming quarters, he said. This puts the central bank in a precarious spot.

“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation,” Mr. Macklem told the Senate committee. He was there to explain the bank’s latest interest rate hike, announced last week.

“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses.”

PerpetualDiscounts now yield 6.56%, equivalent to 8.53% interest at the standard equivalency factor of 1.3x. Long corporates have posted an awesome recovery recently to yield 5.49%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has gaped wider to 305bp from the 260bp reported October 26.