Takeaway

The presenter argues the Federal Reserve's unanimous 25 basis point hike has restored its credibility, and the market should now take its hawkish guidance seriously. This action makes a December rate hike a strong possibility if inflation progress stalls, and has immediately increased costs for all floating-rate borrowers.

What the presenter said

• The Fed delivered a unanimous 25 basis point rate hike and signaled another may be possible this year. [00:03, 00:09]
• The Dot Plot showed 16 out of 18 policymakers see another rate hike this year, with four seeing two hikes. [00:58]
• The speaker believes the safest interpretation is that the market now needs to believe what the Fed is telling it. [01:11]
• The Fed delivered on its threats after inflation failed to moderate as they had outlined at Jackson Hole and the July meeting. [01:21]
• With inflation "too high for five-plus years," the speaker notes the Fed is doubling down on its 2% target and will use rate hikes to pursue it. [01:34, 02:05]
• Significant uncertainty remains in the rates market regarding the path of inflation, oil prices, and the impact of the deficit. [02:23]
• The speaker noted that by delivering the hike, the Fed has removed the "question mark" over whether its threats equal action, which has reduced some market anxiety. [02:58]
• Floating rate loans became 25 basis points more expensive overnight. [04:23]
• The presenter states a December rate hike is "absolutely on the table" if inflation remains sideways or progress is not quick enough. [05:54]

Trade ideas

• Instrument: Fixed rates (4-5 years)
  • Direction: Neutral (Hedge)
  • Thesis: Hedging against potential further rate hikes in the current cycle.
  • Entry: When the market decreases its expectations of how many hikes the Fed will follow through with.
  • Time Horizon: Short-term
  • Conviction: Medium
• Instrument: Options (Caps, Cap Spreads)
  • Direction: Neutral (Hedge)
  • Thesis: A good alternative to plain vanilla fixed rates for hedging the rate hiking cycle.
  • Entry: When the market decreases its expectations of how many hikes the Fed will follow through with.
  • Time Horizon: Short-term
  • Conviction: Medium

Levels and data cited

• Fed Funds Rate: Increased by 25 basis points.
• Fed Dot Plot: 16 out of 18 policymakers see another hike this year; 4 see two hikes.
• Fed Inflation Target: 2%.

Risks and what would invalidate this

• Uncertainty about whether inflation will come down.
• Uncertainty about whether oil prices will come down.
• Uncertainty about the future impact of the deficit on interest rates.