PrefBlog

So the Fed hiked 25bp today:

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 has eased somewhat but remains elevated.

Russia’s war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. 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 4-1/2 to 4-3/4 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 extent 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 its previously announced plans. 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 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; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

There was some additional information in the press conference:

Powell is giving a clear reason for one reason why the Fed does not plan to stop their campaign, saying that the labor market remains extremely tight. While “the pace of job gains has slowed” the labor market continues to be “out of balance.”
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Powell notes that wage growth is abating, but remains pretty elevated. But he calls job openings — there are 1.9 per every unemployed person — important. And he notes that job creation is strong and quits are high. In short, he still sees a pretty strong job market.
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“There is only one way forward here,” Powell says, when asked about the debt limit: Congress must raise it. Anything else, like planning for what would happen if the debt limit is not raised, would be risky, he says.
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“No one should assume that the Fed can protect the economy” if Congress fails to raise the limit, he adds.
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Investors and policymakers have been in a standoff for a while now, with the Fed indicating it plans to keep rates high and markets expecting the central bank to cut rates later this year as the economy loses momentum. Powell took a shot across investors’ bow just now: “I just don’t see us cutting rates this year,” he said.

PerpetualDiscounts now yield 5.99%, equivalent to 7.79% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.89% on 2023-1-20 and since then the closing price has changed from 15.51 to 15.53, an increase of 13bp in price, with a Duration of 12.36 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 1bp since 1/20 to 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 290bp from the 295bp reported January 25.

This entry was posted on Wednesday, February 1st, 2023 at 9:47 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.