Fed likely to send a clear signal from policymakeers at the May FOMC meeting – Wells Fargo

At the next FOMC meeting (May 3-4), the Federal Reserve is expected to raise interest rates by 50 basis points. According to analysts at Wells Fargo, the first 50 bps rate hike in over 20 years and the start of balance sheet runoff shows that the Fed means business in its fight against inflation.

Key Quotes: 

“The FOMC raised its target range for the fed funds rate by 25 bps at its March 15-16 meeting. However, the minutes of the meeting revealed that some members would have supported a 50 bps rate hike had the conflict in Ukraine, which began only three weeks earlier, not clouded the outlook.”

“We look for the FOMC to announce a 50 bps rate hike at the conclusion of its May 3-4 meeting. A parade of Fed speakers have signaled over the past few weeks that they would be comfortable hiking the funds rate by 50 bps at that meeting.”

“In our view, the risk that the Committee surprises the market with a 75 bps rate hike, although not our base case call, is materially greater than a 25 bps surprise increase. We expect that the FOMC will hike rates by another 50 bps at its June 14-15 meeting before beginning to raise rates at a more gradual 25 bps-per-meeting pace in July.”

“We also look for the FOMC to announce a plan at its May 3-4 meeting to start shrinking its balance sheet by no longer reinvesting the principal payments received from its securities holdings, up to a monthly cap.”

“We look for the Fed to shrink its balance sheet from roughly $9 trillion today to about $6.5 trillion at end-2024.”

“Regardless of the exact magnitude, the May 3-4 FOMC meeting likely will send a clear signal from monetary policymakers. The first 50 bps rate hike in over 20 years and the start of balance sh