By: Josh Cannington, VP - Interest Rate Derivatives
Floating rate loans became 25 basis points more expensive the night the Federal Reserve raised rates, and the vote to do it was unanimous. Fed communication style is what turned that move into a signal rather than a single adjustment, because the Federal Reserve had spent months describing what inflation needed to do to avoid a hike, then hiked when it did not. For corporate borrowers, the practical consequence is that Federal Reserve warnings now carry a price, and every future warning has to be treated as a live scenario rather than rhetoric. The 10-year Treasury yield fell on the day, a reaction that says more about restored credibility than about the quarter point itself.
Josh Cannington is Vice President of Interest Rate Derivatives at StoneX Markets LLC, where he works with U.S. commercial borrowers structuring hedges against floating rate debt and executing across over-the-counter derivatives markets. His coverage spans how monetary policy and inflation feed through to corporate rate exposure, including the market's transition from LIBOR to SOFR, and the hedging decisions that sit downstream of a Federal Reserve announcement.
"Warsh doesn't talk a lot, and when he does, he doesn't say much", Cannington says of the chair, describing a style that sits behind an opaque veil. The shift from the previous chair is one of communication rather than mandate, and it changes the raw material borrowers use to build a hedging view between meetings. Consequently, a borrower who once mapped the rate path from a steady stream of guidance is now working from fewer signposts, with the same exposure sitting on the balance sheet. Notably, the Federal Reserve has been explicit about the one thing that matters most, that it will raise rates until it sees 2 percent inflation, and that clarity of intent is not the same as visibility on timing.
Federal Reserve credibility, not the quarter point, is what moved the long end of the curve, and the 10-year Treasury yield fell as the argument over whether threats equal action was settled. Cannington frames the immediate cost bluntly, noting that "all of those floating rate loans just got 25 basis points more expensive overnight", while fixed rates had repriced long before the meeting because that market reflects where floating rates are expected to go. The front end, in contrast, is not giving the hikes back, and according to Cannington "the market is going to move before the Fed does". For a treasurer, that ordering is the whole point, because the entry points for hedging appear when the market pulls back on how many hikes it expects, not when the Federal Reserve confirms them.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Josh Cannington, StoneX VP of Interest Rate Derivatives
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