Fed set rate hike ‘ceiling’ at 75 basis points, strategist says

RBC Capital Markets Head of Rates Strategy Blake Gwinn joins Yahoo Finance Live to discuss the Fed's policy decision and dot plot projections.

Video transcript

JULIE HYMAN: Let's talk more about the Fed here with RBC Capital Markets head of rate strategy, Blake Gwinn. He's joining us live in the studio. We heard about the enthusiasm, the tech spending that's continuing on out there on the part of Salesforce. Brad Smith was very excited about your FOMC recap title, your note title this morning, "All About That Pace." He was enjoying the Meghan Trainor reference, all about that pace from the Fed. And indeed, it was all about the pace, and the pace is going to keep right on going. For how long and at what cadence can we expect the Fed to keep raising rates?

BLAKE GWINN: I mean, I still remember back in June when 75 basis point hikes were still supposed to be something that was very abnormal. But here we are x number of hikes later, and I think what the Fed did yesterday via the dots that they released, the forecast, basically told us that the 75 basis point pace of hikes is going to continue at least until November, which I think is notable because as recently as a kind of pre-CPI report, we were expecting that turnaround to really happen at this meeting.

But indeed, another 75 and continuing into November. So that's really where we're looking for the downshifts, but obviously, I think there's risk to the upside for that as well if we continue to see very high CPI prints.

BRAD SMITH: What parts of the market do you believe would most-- be most heavily impacted by this new target that's set forth as well, as we were looking at some of the declines earlier, especially in the tech sector, as we've been continuing to track that, too?

BLAKE GWINN: Yeah, I think on the equity side, it's really mostly the heavy interest rate sensitive sectors, as you mentioned, tech sector. But as a rate strategist, I really think about the different parts of the yield curve. And there, I think the front end is really what was susceptible to that dot plot yesterday. And that's really what we saw after the meeting, a very clear cut response to this higher expected path of rates.

The front end of the yield curve went considerably higher, but at the backend, we actually saw I think some of that hard landing concerns and recession risk pricing itself into the backend with this kind of risk averse move pulling those yields further down. So for me, it's really about the front end pricing in that higher path.

JULIE HYMAN: With this outlook for rates, is there any-- outlook for rates on the part of the Fed, is there any ceiling on what we're going to see from the short end of the curve, for example?

BLAKE GWINN: Yeah, I mean, I think at least-- and again, back to the pace and the title you mentioned, I do think they've made it very clear that the ceiling is 75 basis points. I think 100 basis points has essentially been taken off the table now. We heard a little bit about 100 basis points heading into this meeting. But it never really kind of took sail in the way that some of the prior 100 basis point conversations have.

So I think we've taken that off the table. I think also with the dot plot only showing a 25 basis-- one 25 basis point hike next year in the median forecast, you know, I think that also kind of means that we're fairly priced at this point. So I mean, if you look at kind of where front end yields are, we're essentially pricing most of those hikes very accurately that the Fed has projected.

So unless we see, again, some continued upside surprise in CPI, another really big print, or if we see Fed speakers come out and start to suggest that they need to do more 75s, I mean, those would really be the things that would, I think, take those front end yields higher. But for now, I think we're probably fairly priced for the Fed path that we're expecting at this point.

BRAD SMITH: In your note, you also mentioned that the press conference was only really notable in that Powell largely avoided saying anything notable. It's a job that none of us really envy having right now, being the Fed Chair or being on the FOMC. But if there is anything that stuck out to you that was not mentioned that you expected to hear from the Fed at this point in time, what is that, just so that we know to pay attention to that going forward from here.

BLAKE GWINN: No, I think Powell has perhaps learned his lesson a bit after the kind of dovish pivot debacle that we had after a prior meeting.

BRAD SMITH: Do you think that's restored credibility in the Fed?

BLAKE GWINN: I mean, I wouldn't go so far as to say it restored credibility. But I think it was heartening to see that he did avoid some of these pitfalls yesterday. I think there were points in the press conference where it would have been very easy for him to kind of slip up, as he continued to answer the question, and say something that markets would have latched on to as something that was particularly dovish. But he sidestepped those landmines.

And I think in the past, we've seen him talk in circles to the point where he says something, markets see that as very dovish, and what we get is exactly the opposite of what the Fed wants, which is financial conditions loosening, because now they expect the Fed to pull back. So he didn't do that.

And I think Jackson Hole was the first time. We heard later on that he stripped down that speech. He took out all the extraneous stuff and said, this is my core message. It was extremely short, extremely tight. You know, he didn't have any of that kind of fluff around it that would risk markets coming away with a dovish impression. And he did the same yesterday.

BRAD SMITH: Yeah, shorter than an NFL quarter for sure. And we expected a lot more at Jackson Hole. So it's extremely measured, it sounds like, that he's going to be from going from this point forward. Blake, appreciate the time here this morning and for the recap. RBC Capital Markets head of rates and strategy, appreciate the time this morning.