A long time ago in an economic galaxy far, far away: The Federal Reserve raised their target for overnight interest rates by 50 basis points in one clip—the first time they’ve done so in decades.

  • The Federal Reserve raised its target for overnight interest rates by 0.50% to a range of 0.75 – 1.00%, marking the second hike of the cycle.
  • Policymakers agreed to begin shrinking their balance sheet at a rate of no more than $95 billion/month by allowing bonds to mature/run off.
  • Language in the FOMC statement was relatively little changed, though “ongoing increases” still the key phrase.
  • Continual grab for downside protection in the rate markets will only stop when Powell provides an indication of the maximum hike pace.

The year was 2000, and that hike proved to be the terminal one in a hiking cycle, coinciding as it did with the sharp deterioration of financial conditions and the bursting of the Dot-com bubble. Today, we’re still near the beginning of the cycle, but policymakers nonetheless opted to (attempt) to fight inflation with sharp policy tightening. While overnight interest rates are far from contractionary, longer-term interest rates have already started to act like a tractor beam pulling down economic growth in hot sectors. Unlike in 2000, the expectation of future rate hikes now does the job more than the actual hikes themselves.

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About the author

Guy LeBas

Director, Custom Fixed Income Solutions

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