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Barrons item May 4 re Fed Action . . .

How the Fed Chief Soothed the Markets: Changing Expectations Did the Trick

By ... Randall W. Forsyth . . . Barrons ...
May 4, 2022 6:15 pm ET

Stocks and bonds rallied sharply in reaction, with major equity averages jumping around 3%. Treasury yields, fell sharply, especially for shorter maturities which are most sensitive to expectations of future Fed moves. In particular, the two-year note fell 16.2 basis points, to 2.638%, while the benchmark 10-year fell 3.5 basis points to 2.992%. (A basis point is 1/100 of a percentage point.)

Spurring the rallies in equities and debt markets was Powell’s comment that a 75-basis-point hike in its federal funds rate target wasn’t under active consideration.

Now the fed funds futures market is pricing in 50-basis-point increases at each of the next three confabs, June 14-15, July 26-27, and Sept. 20-21. That would bring the Fed’s target range up to 2.25%-2.50%.Fifty is the new 25,” observes Vincent Reinhart, chief economist for Dreyfus and Mellon Bank Until now, the Fed has moved only in quarter-point increments but Powell made clear that half-point moves were likely as it attempts to move monetary closer to neutral, a stance that neither stimulates nor slows the economy.

Reinhart noted it wasn’t an accident Powell pointed to the two-year Treasury yield, which he said has risen all the way from just 0.20% to 2.80% (and coincidentally fell back to 2.65% as he spoke) as indication of the market’s anticipation of future Fed moves. Powell emphasized the strength of the labor market, mentioning more than once the March job openings and labor turnover (JOLTS) data released Tuesday, which showed 1.94 job openings for every unemployed person. But there are a lot of plausible paths to recession, and if we see three monthly increases in this data, that would signal a slowing of labor demand and signal recession, Reinhart said.

In sum, markets emitted a sigh of relief that the Fed isn’t planning bigger rate hikes at coming meetings. At the same time, Powell emphasized much of the tightening of financial conditions needed to slow inflation has already been effected by the markets. In all, it adds up to a dovish tightening.
 

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