Fed’s 25 Basis Point Hike Signals Peak Interest Rate of 5.5%
The US Federal Reserve’s recent 25 basis points hike in interest rates marked a slowdown in the Fed’s five previous hikes, which included four consecutive 75 basis point hikes followed by a 50 basis point hike. Swaps that refer to the Federal Reserve's September meeting project that the central bank will boost policy to a high of roughly 5.5%.
The Fed has raised its policy rate eight times since March 2022, most recently to a range of 4.5%-4.75% on February 1, after dropping the lower bound to 0% two years earlier at the onset of the pandemic. Atlanta Federal Reserve Bank President Raphael Bostic has suggested a further increase in interest rates and that the policy interest rate needs to rise to between 5% and 5.25%. Minneapolis Federal Reserve President Neel Kashkari has expressed openness to further interest rate hikes, “whether it’s 25 or 50 basis points.”
Yields and prices share an inverted relationship, as one basis point equals 0.01%. The yield on the benchmark 10-year Treasury note briefly approached 4% on Tuesday, a milestone level at which it hasn’t sustainably held above for more than a decade. Yesterday, the 10-year yield (US10Y) marked the first time since November that it exceeded 4%, rising 8 basis points to 4.08%. Yesterday, the 2-year yield (US2Y) increased by 4 basis points, reaching a new post-2007 peak of 4.93%.
Stronger-than-expected US data this month has led to a dramatic repricing higher in Fed rate hike expectations on the growing ‘higher-for-longer’ rates view. Futures rates are now predicting that the Federal Reserve's benchmark rate will reach a high of 5.42% in September, up from the current range of 4.50-4.75%. This is a jump from less than 5% at the end of January.
The likelihood of the Federal Reserve ceasing to raise interest rates in the near future has been diminishing due to persistent inflation, which has had the consequence of increasing Treasury yields. Yields on two-year bonds increased to 4.72%, and yields on 30-year bonds increased to 3 Atlanta Fed President Raphael Bostic has said he believed rates would need to go higher still and remain elevated “well into 2024” as the battle with inflation continues.
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