🏦🇺🇸Cable FX Macro Weekly Note: FOMC June Monetary Policy Meeting

**As seen in Risk In The Week 06/10/2022, subscribe at cablefxm.co.uk/reports

The Fed faces a variety of challenges as inflation proves to be more sticky than expected, wages remain strong, supply chain issues feed into goods and the probability of a recession increases by the week. Last month, the Fed raised the Federal Funds Target Rate to 1.0%, this was a 50bps hike, in line with the median expectation. The balance sheet runoff was announced at a pace of $47.5B per month starting June, this will be stepped up to $95B/month after August. As the FOMC delivered the largest rate hike in two decades, focus will fall in the pace of the increases, we will be delivered an updated SEP and dot plot next week. Back in March, the summary of economic projections showed the median dot at 1.875% for 2022, 2.75% for 2023, and 2.375% in the longer-term, these will be revised higher. It is worth noting that the OIS curve implies rates above 3% by 2023 and rate cuts by 2024. These expectations will be closely looked as the market awaits to see if implied curves will be delivered by the Fed. This week we saw consumer price data beating the highest estimate in the forecast range at 8.6% in the headline and 6.0% in the core Y/Y.

The CPI release sent bond yields higher as the tightening path got repriced, the U.S. 2-year yield jumped by 25bps to 3.06% (the highest since 2008). With the Federal Funds Target Rate at 1.0%, this leaves the Fed just as behind the curve as they were before hiking by 50bps in May. These developments caused some desks to bring back 75bps calls, with the likes of Capital Economics, Jefferies and Barclays penciling moves by this pace as soon as next week. As of market pricing, overnight index swaps price in 240bps of tightening by the end of the year, compared to 210bps pre-inflation figures, this equals to the Fed delivering 50bps increments in all the remaining meetings of the year. The desk at Barclays says the three-quarter increment is a close call and that this could happen either in June or July, they also lift their terminal rate expectation by 25bp to 3.00-3.25%, analysts expect this will be reached by early 2023. Analysts at Wells Fargo Securities say next week’s rate hike is unlikely to surprise markets, so they will be focusing on the SEP and dot plot adjustments, they see the median dot at 2.875% for 2022. Wells Fargo notes that if the median dot for the end of this year is above the neutral rate, then the FOMC would be more hawkish than what markets have been estimating.