(Premium) FICC in Focus: Metals Meltdowns, Uninteresting Rates, and Some Eye-Catching Developments in Currencies

The Federal Reserve held rates constant at this month’s FOMC meeting, an unsurprising outcome after the latest CPI report showed price pressures continuing to moderate. The quarterly Summary of Economic Projections showed that the median Fed participant sees two more quarter-point hikes by year-end. That would imply a terminal rate of 5.50%- 5.75% for this cycle, and the highest Fed Funds rate in 20 years.

Jerome Powell spent this week reinforcing his view that more hikes are on the way, but the recent decision to not raise rates after doing so at every meeting for more than a year is a clear signal that this hiking cycle is nearing its end. Modest changes to the terminal rate aren’t the same as what happened in 2022, when the Fed went from talking about one 0.25% hike at year-end, to implementing the fastest tightening cycle in 40 years. Here’s a brief recap of the timeline for those that have blocked last year’s turmoil from their minds:

Of course, inflation could always surprise us by reaccelerating. (We aren’t economists, after all, and, even if we were, we’d probably be terrible at predicting the path of future activity. The latest GDP report proved that even predicting the past can be quite perilous.) If it does, the Fed may well respond by tightening policy to a level that no one expects.

For now, the market is discounting the likelihood of that scenario. Inflation was a problem for asset prices last year because higher inflation meant higher interest rates, and higher rates meant a stronger US Dollar. We shared with our subscribers many times an overlay of Treasury yields, the US Dollar Index, and the S&P 500 index, pointing to how tightly correlated the 3 were.

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