Fed is widely expected to raise interest rates by 0.75% today, for the second time in a row, to bring the federal funds rate target rate to 2.25-2.50%. More tightening is expected afterwards, as most FOMC members believed that interest rates have enter into “restrictive” region to curb inflation, which is already at multi-decade high.
The questions are on the pace of tightening beyond the neutral range, its impact on economic activity, and risks of recession as a result. Fed Chair Jerome Powell will be grilled for these questions. But a concrete answer is unlikely for now. The next rate-setting meeting on September 21 is nearly two months away. Two sets of prices, jobs and activity data will be published during the time, and before the new economic projections. The situation is so uncertain for Powell to tell the markets anything meaningful.
Here are some previews on Fed:
- FOMC Preview – Assessing the Balance of Risk for Traders
- Fed to Likely Hike by 75 bps But May Still Weigh 100-bps Option
- FOMC Meeting Preview: Traders Looking for 75bps, Powell’s Presser Key
- All Eyes on Bond Yields ahead of FOMC
As for market reaction, a major focus is on 10-year yield. It’s so far still sitting comfortably above a key support zone of 2.709 and 38.2% retracement of 1.343 to 3.483 at 2.665. There is prospect of a rebound to flatten the yield curve of 2-year (3.053%) to 10-year (2.787%). But a firm break below 2.709 could signal a flush into bonds, which could send 10-year yield towards 50% at 2.413, and below. That will threaten the curve of 3-month (2.507) to 10-year yield, which will be a big warning.