President of the Federal Reserve Bank of St. Louis, James Bullard, delivered hawkish remarks in an exclusive interview with Reuters on Tuesday, saying that interest rates should rise to 5.5-5.75% range.
Here are the main takeaways from Bullard's interview:
- Bullard continues to envision a sufficiently tight policy rate in the 5.50%-5.75% range.
- Interest rates must continue to climb since there hasn't been any noticeable progress on inflation.
- Bullard said he felt "the bias would be higher for longer" to get inflation fully under control.
- Forecasts for a U.S. economic recession neglect labor market strength, and pandemic savings must still be utilized.
- The likelihood of widespread bank stress appears to have diminished, but officials are keeping a close watch on the situation.
- At the next meeting, the Fed should avoid providing significant forward guidance and instead keep alternatives open.
Market Reactions:
Fed futures contracts presently assign an 88% probability for a 25-basis-point hike at the FOMC meeting in May, according to the CME Group Fedwatch Tool.
A rate rise to 5.25-5.5% in June is presently priced in at a 23% chance, while a rate hold at 5-5.25% is priced at a 67% probability.
Rate cut bets for the July FOMC meeting have been further reduced, with speculators now assigning just a 25% chance of the fed funds rate reversing to its present range of 4.75-5%, and a 3% chance of a drop to 4.5-4.75%.
U.S. two-year Treasury yields held steady at 4.18% after surging 22 basis points in the last two sessions.
The iShares 20+ Year Treasury Bond ETF TLT rose 0.33% on the day, after falling 2.4% in the past five sessions.
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