For "Peak Hawkish", Level > Rate
Following the FOMC meeting last week, we seem to be entering a different stage of the Fed trade. Powell effectively committed through the summer to 100bps (50 in June and July) of hikes and the next question is do 50s continue at September FOMC or do we return back down to 25s? Following the meeting and the press conference, I found the bond market’s reaction to Powell to be somewhat appropriate. 75s have to become a much smaller part of the distribution and for volatility in fixed income markets, this has been a marginal variable since Bullard/Daly first said it.
What seems to be setting up is, the Fed are possibly no longer incrementally hawkish, but they are still quite hawkish. I was of the view, that pre neutral, the pricing bias was always going to be asymmetrically “more” because of the extreme desire of the FOMC to be at neutral. So what would happen in the pricing is, that every-time someone on the Fed spoke, we priced more in the front end or for 2022 hikes because there was “marginal” hawkishness.
To me Powell might have ended this last week by pre-committing to the next two meetings. The question now is, does it matter that the Fed is not incrementally hawkish if it is at a very high level of hawkishness? I think this question is especially prevalent following todays CPI number.