Monetary Policy: The financial markets were expecting a hawkish Federal Open Market Committee (FOMC) and the Federal Reserve delivered. As expected, the Fed hiked the target Fed Funds rate by 25 basis points (bps) from 1.75% to 2.00%. In addition, as was flagged in the May minutes, the Fed hiked the Interest on Excess Reserves (IOER) by 20 bps to 1.95%, describing it as a « minor technical adjustment » so that the Funds rate would trade well within the target range. The balance sheet normalization caps will increase, as planned, to $40 billion per month beginning in July.

Fixed Income: The hawkish FOMC statement and the press conference indicate upward pressure on US fixed income markets should continue. At the same time, the Fed may have to respond if the Treasury yield curve continues to flatten. We do not believe the Fed wants an inverted yield curve, but the addition of the “symmetric” language regarding inflation, discussed below, may have complicated the situation…