Rates as of 0600 GMT

Market Recap

Another day of monetary policy divergence. The European Central Bank ECB met yesterday and did exactly what was expected of them, i.e. nothing. They confirmed and somewhat strengthened their commitment to end net asset purchases in Q3 but thats about all.

By contrast, several Fed speakers made comments that sent US rate expectations up further. In particular, New  York Fed President Williams voter said hiking rates by 50 bps was a reasonable option for us because the federal funds rate is very low. We do need to move policy back to more neutral levels, he said.

The resulting contrast sent USD up and EUR down.

The big question is, does he mean neutral in nominal terms or real terms? The Fed estimates that neutral in nominal terms would be around 2.5, but neutral in real terms would be significantly higher. As it stands now, the real fed funds rate is the lowest its been sincewell, since there was a fed funds rate. To get the real fed funds rate back up to the level that prevailed before the Global Financial Crisis in 2008 would require some 950 bps of tightening! That would surely send the US economy crashing.

In any event, the markets expectations for Fed interest rates keep rising. The market now believes that the Fed is literally behind the curve and will have to hike even more rapidly than FOMC members predicted just a month ago.

The market is now discounting a 50 bps hike at the May 5th meeting

and another 50 bps hike…