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Fed to markets: June rate hike coming your way

  • Fed funds futures indicate about a 75 percent chance of a June interest-rate hike, according to Michael Schumacher of Wells Fargo Securities.
  • Rick Rieder of BlackRock said the Fed's intentions are clear: "Only a significant ... deterioration in the economic data, or a financial market shock ... is likely to force the central bank from that route."

  • The Fed has forecast two more rate hikes this year, and many strategists expect it to tackle its balance sheet after those moves.

As expected, the Fed gave a nod to a temporary weakness in the economy and signaled it is still moving ahead with policy tightening.

"They're looking past the first-quarter weakness. They are laying the groundwork for a June rate hike, in my opinion," said Peter Boockvar, chief market analyst at Lindsey Group.

Fed funds futures indicated just about a 75 percent chance of a June interest-rate hike, up about 5 percentage points after the announcement, according to Michael Schumacher, head of rates strategy at Wells Fargo Securities.

"It seems pretty optimistic. ... There's no big difference between this statement and the last one. The comment that they are ignoring weak first-quarter growth is the big thing. There's nothing really changed in their path," Schumacher said.

First-quarter growth grew at a weak 0.7 percent, but economists expect a bounce back and some see growth over 3 percent. The Fed acknowledged the softness in its statement.

"The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term," they wrote.

The Fed also noted that inflation edged lower in March but that it expects it to stabilize.

"While many have suggested that recent data softness, such as the 0.7 percent initial print on first quarter GDP could slow down the Fed's actions, we think that the Committee will be unwavering in its path toward at least two more hikes this year, and today's statement reflects that contention," wrote Rick Rieder, BlackRock's chief investment officer and co-head of global fixed income.

Rieder said the Fed has been clear in articulating its intentions. "In our view, only a significant and sustained deterioration in the economic data, or a financial market shock due to an unexpected political event, is likely to force the central bank from that route," he said.

The statement did not mention changes to the Fed's balance sheet, which officials were expected to have discussed at length during the two-day meeting. That discussion should be revealed in the minutes of the meeting, expected to be released May 24.

Instead, the Fed noted in its statement that it was maintaining its strategy of balance sheet reinvestment, meaning it replaces securities as they roll down. The Fed has forecast two more rate hikes this year, and many strategists expect it to tackle its balance sheet after those moves.

The Fed has said it would like to begin shrinking its balance sheet as early as this year. Many market pros expect some action on the balance sheet around the December meeting or in early 2018, after it raises interest rates in June and September.

The Fed "will also be very deliberate in reducing the amount of securities held on its balance sheet from roughly $4.3 trillion to ultimately something closer to $2.75 trillion [over a long period of time]," Rieder added.

The Fed could reduce its balance sheet by ending its policy of reinvesting in Treasurys and mortgage securities when they reach maturity. Earlier Thursday, the Treasury noted in its refunding statement that it would have to increase issuance when the Fed stops reinvesting.

Treasury yields, at the short end of the curve, rose after the Fed's 2 p.m. EDT announcement. The 2-year, which most reflects Fed policy, rose to 1.30 percent from about 1.28 percent. The 10-year also edged higher to 2.31 percent. Yields move inversely to price.

Stocks were mixed, and the Dow turned positive after the announcement.