Fed hikes 50bps, first since 2000, announces QT plan

The FOMC on May 4 2022 raised the target range by 50 bps to 0.75-1.00%, the first half-point hike since May 2000. The committee also announced balance sheet reduction (QT) starting June 1 at $47.5B/month (ramping to $95B/month after three months), with caps of $30B Treasuries and $17.5B MBS initially. Chair Powell explicitly ruled out 75 bp hikes in the press conference, a comment markets took as dovish relief.

The rally was violent and short-lived. The S&P 500 gained 3% on the day, its best session since March 2020 recovery. Growth stocks (QQQ +3.4%) and speculative segments led. The next session, May 5, reversed the entire rally and then some as traders reassessed the hawkish signal embedded in the QT announcement. By mid-May the S&P was 5% below the May 4 close.

The session illustrated the "relief rally trap" that characterized 2022's policy backdrop: any deviation from maximum hawkishness was treated as dovish by positioning, but the underlying trend of rising rates and tightening liquidity continued to grind risk assets lower. Powell would walk back the "no 75" guidance by June as May CPI printed hot at 8.6% YoY. The May 4 50bp would be the only one of the cycle; the Fed moved to 75 bps at four consecutive meetings from June through November.