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US OUTLOOK/OPINION: Direction Of Rate Travel Very Different Now To 2022 (2/2)

US OUTLOOK/OPINION
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  • Additionally this time we got Fed commentary after the data from arguably the number 2 and 3 FOMC officials in Waller and Williams which didn’t appear to signal a preference for a 50bp cut.
  • The direction of travel is also important here. The latest data have seen calls for a 50bp move evaporate from a few to only a couple of analysts – but in Jun '22, several sell-side analysts shifted to 75bp from 50bp after seeing CPI, in addition to several who had pre-existing calls for 75bp. There was even speculation the Fed would hike 100bp (again, post-CPI, pre-WSJ piece). This time we entered the day with a minimal implied chance of a surprise, whereas in June 2022, on the Friday before the FOMC meeting itself there was 25% probability implied of a 75bp hike.
  • The bottom line is that in June 2022, the "leak" eliminated uncertainty going into the meeting, rather than unnecessarily increase it. And the Fed at that time was seen as losing control over the narrative and inflation itself. The FOMC had already started a hiking cycle, and several participants had expressed explicit support for 50bp hikes for at least the next couple of meetings. This time, it's not out of the question that some FOMC hawks could make the case to hold rates.
  • Bucking fairly settled market expectations this time around is certainly possible, but it would be an odd way to mark the first rate cut in four years.
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  • Additionally this time we got Fed commentary after the data from arguably the number 2 and 3 FOMC officials in Waller and Williams which didn’t appear to signal a preference for a 50bp cut.
  • The direction of travel is also important here. The latest data have seen calls for a 50bp move evaporate from a few to only a couple of analysts – but in Jun '22, several sell-side analysts shifted to 75bp from 50bp after seeing CPI, in addition to several who had pre-existing calls for 75bp. There was even speculation the Fed would hike 100bp (again, post-CPI, pre-WSJ piece). This time we entered the day with a minimal implied chance of a surprise, whereas in June 2022, on the Friday before the FOMC meeting itself there was 25% probability implied of a 75bp hike.
  • The bottom line is that in June 2022, the "leak" eliminated uncertainty going into the meeting, rather than unnecessarily increase it. And the Fed at that time was seen as losing control over the narrative and inflation itself. The FOMC had already started a hiking cycle, and several participants had expressed explicit support for 50bp hikes for at least the next couple of meetings. This time, it's not out of the question that some FOMC hawks could make the case to hold rates.
  • Bucking fairly settled market expectations this time around is certainly possible, but it would be an odd way to mark the first rate cut in four years.