Why One Bank Now Expects Two Huge Fed Hikes In A Row

On the heels of Jim Bullard’s trial balloon, and amid unrelenting hawkishness from other officials including Jerome Powell, one bank now expects the Fed to hike rates 75bps at the June policy meeting. And again the following month.

Bullard raised the specter of a 75bps hike during a virtual presentation for the Council on Foreign Relations Monday, and he rekindled the idea Thursday. It’s been done, he reminded markets, during remarks at Princeton. And the “world doesn’t come to an end.”

If you ask Nomura, the Fed was testing the waters. “Comments from FOMC participants this week were an intentional effort to ‘trial balloon’ a 75bps hike and then closely monitor the market’s response,” the bank said, in a note adopting a pair of 75bps moves as their baseline (table on the left, below).

Although Thursday’s action in rates was dramatic (see the second linked article above), it wasn’t what the Fed might call disorderly. 2s sold off sharply, with yields reaching cycle highs and both 5s and 7s achieved a 3-handle, but the reaction in equities was pedestrian, notwithstanding incredulous “reversal” headlines from mainstream media outlets. Friday was a different story, though.

The Fed has been especially keen on getting rates to neutral “expeditiously,” which Bullard called the Committee’s new “word of the day.” Obviously, two 75bps hikes on the heels of an assumed 50bps move in May would represent a big stride down the road to neutral.

“We now expect the terminal rate to be reached slightly earlier, likely by May 2023 rather than July,” Nomura said, noting that they still see rate cuts “to around 2% in early 2024.”

Notably, the bank emphasized upside risks to their already hawkish forecast. “There is a risk the Fed could continue the rapid pace of rate hikes for some time to push up the policy rate deeply into restrictive territory earlier than we currently expect,” the note said.

At the same time, Nomura flagged the possibility that “the impact of 75bps rate hikes on market functioning could be larger than we assume,” in which case the Fed could be limited to 50bps increments.

“For some time, our view has been that if the Fed could hike 200bps at one meeting without significantly affecting market functioning, they would,” the bank wrote.