75 Basis Hike – Now What? + Futures Trading Levels 6.16.2022

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08:38 *(US) FED CHAIR POWELL: DOES NOT EXPECT 75BPS HIKES TO BE COMMON; EITHER 50BPS or 75BPS RAISE SEEMS MOST LIKELY AT NEXT MEETING – POST RATE DECISION COMMENTS – Next meeting could well be decision between 50bps and 75bps; Would take us to a more normal range and then we’d have optionality on speed of rates moving forward – SEP shows we want to see policy at modestly restrictive level at end of this year; That’s generally a range of 3-3.5% – Fed will try not to add uncertainty – Further surprises in inflation could be in store; Will need to be nimble – In current circumstances we think it’s helpful to provide more clarity than usual on policy; Markets show they understand the path we lay out – When I offered guidance of 50 bps hike at last meeting, I said that if data came in worse than expected, we would consider more aggressive move; CPI and inflation expectations data last week made us realize 75bps was way to go – Did not want to wait another six weeks for larger move; We thought strong action was needed at this meeting – We would like to see a series of declining inflation readings; Looking for ‘compelling evidence’ of inflation abating – We had expected to see inflation flattening out by now – Demand is still very hot; We would like to see demand moderating – We’d like to see labor market in better balance between supply and demand; Feels there is a role for Fed in moderating labor demand – Fed will not be completely model driven in our approach – Neutral rate is ‘pretty low’ these days; We will find out neutral rate empirically – Data shows inflation expectations are still in place where short-term inflation high but comes down sharply over the medium term; Last week’s Univ of Michigan inflation reading was ‘quite eye-catching’ – This was a very unusual situation where we got new inflation data that affected the outcome of the decision late, during the blackout period – What we want to see is a series of declining monthly inflation readings; We will not declare victory until we see compelling data that inflation is coming down – Clearly our goals are getting inflation to 2% while keeping the labor market strong; The pathways to achieving this have become more challenging due to factors outside of our control (like the Ukraine war) – Expectations are at risk due to high headline inflation – Consumer spending overall remains strong; No signs of a broader slowdown in the economy; People are talking about a slowdown a lot due to higher gas prices and lower stock prices, but not seeing signs of broader slowdown – On rates there is always the risk of going too far or not far enough; Worst mistake we could make would be to fail on inflation and restoring price stability, that is the bedrock of the economy – We don’t think we are seeing a wage/price spiral – I think the projections in the SEP would meet the test of a ‘softish’ landing; I do think it is possible, but the events of the last few months have created a greater degree of difficulty – We will have the Fed funds rate somewhere in the 2%’s by the end of the summer; We will also have more data by then – This is a highly uncertain environment; We will be determined but flexible – Have no reason to think that QT will lead to liquidity issues in the market- Carefully watching how much policy will affect housing market and residential investments – Source TradeTheNews.com

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