BMO Post-FOMC Minutes Assessment

BMO note that “Treasuries spent much of Wednesday’s session trading stronger; a move led by the front-end of the curve. The notion that the 2-Year sector reached its upper bound at 1.64% on the extremes of the 50bp rhetoric/speculation continues to resonate. With 2-Year yields dipping below 1.50% following the FOMC minutes release and the Jan ‘23 fed funds futures contract at 163bp, the market is now drifting back toward a more pedestrian Fed hiking cycle with six hikes this year. We suspect that as the process unfolds, the debate will range between 5 and 6 quarter-point moves; particularly if next month’s liftoff is, in fact, 25bp and the language around the move doesn’t reflect the same urgency demonstrated by Bullard on Monday (which it won’t).”

• “The minutes also reinforced our take that the quarterly cadence of 25bp will be the default position for the cycle, and the off-cycle meetings will see additional 25bp moves as the data dictates. This is very consistent with the information on offer this afternoon, as the minutes noted “if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate. Some participants commented on the risk that financial conditions might tighten unduly in response to a rapid removal of policy accommodation.” Said differently, if the Fed hikes 50bp in March, risk assets will sell off dramatically because the U.S. rates market will price in a series of 50bp hikes going forward. In this regard, the potential reaction in Treasuries is serving as a powerful disincentive for a hurried path toward higher policy rates. Recall, the December SEP showed 3 25bp hikes in 2022; so perhaps next month’s update will bring the total to 4; certainly not 6.”