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What did the FOMC Minutes Offer?

What did the FOMC Minutes Offer?, FP Markets

A whisker south of all-time highs, the S&P 500 index (and bonds) moderately sold off following yesterday’s minutes’ release.

US Treasury yields rose alongside the US Dollar Index, with the latter touching gloves with the underside of the 50-day simple moving average.

Inflation clearly remains a key determinant for the US Federal Reserve. The latest minutes from the 30-May-1 May FOMC meeting showed that Fed officials remain concerned about inflationary pressures, with some Fed officials questioning whether current policy is restrictive enough to draw inflation back to the Fed’s 2.0% inflation target.

FOMC Meeting

For a sixth successive meeting, the Fed kept the Fed funds target rate unchanged at 5.25%-5.50%. The Rate Statement echoed concern regarding inflation, and the Fed continues to seek ‘greater confidence’ in the disinflation process before pulling the trigger and easing policy.

Fed Chair Jerome Powell added that policy is restrictive and that it would take the Fed longer than anticipated before reaching a level of confidence to cut rates, though he did note that his ‘personal forecast’ was that inflationary pressures would begin to subside again this year. He pretty much repeated this on 14 May.

Since the FOMC meeting, Powell’s comments have been echoed by his peers. Recently, Cleveland Fed chief Loretta Mester and Boston Fed President Susan Collins emphasised a patient approach, seeking a ‘few more months of inflation data’ before gaining enough conviction to cut rates.

Fed Minutes Echo Wait-and See-Approach

Key Takeaways from the Minutes:

  • Yesterday’s minutes communicated that ‘Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective. The recent monthly data had showed significant increases in components of both goods and services price inflation’.
  • The minutes also showed that ‘various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate’.
  • ‘A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation’.
  • The minutes presented that participants discussed the possibility that the neutral rate or r* was higher and, thereby, higher rates may be less effective than in the past.

We are clearly in wait-and-see mode for the time being, with many desks claiming the likelihood of rates increasing is slim. The base case is that the Fed will be closely watching inflation measures and should continued disinflation play out, a rate cut could be on the table for September.

Goldman Sachs CEO David Solomon, however, recently spoke on Bloomberg and noted that the current economic data does not seem compelling enough to warrant a rate cut this year from the Fed. Markets, for now at least, disagree and are currently pricing in less than two rate cuts for the year (-40bps), which, of course, is quite different from the beginning of the year when markets were pricing in nearly seven rate cuts. The first -25bp cut is fully priced in for November’s meeting (-25.5bps), but September’s meeting still remains a real possibility (-18bps).

Current US Inflation Picture

Following three lousy inflation readings, US CPI inflation came in more encouraging for the month of April and exhibited a deceleration in consumer price inflation for both headline and core numbers on a year-on-year basis. Year on year, headline inflation rose +3.4% in April, down from +3.5% in March (consensus: +3.4%), while core came in at +3.6%, which was also in line with consensus, but down from March’s reading of +3.8%. Month on month, headline rose at a slightly slower-than-expected pace at +0.3%, against +0.4% expected (and prior), and core inflation over the same period was in line with consensus at +0.3%, though down from +0.4% previous.

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  • What did the FOMC Minutes Offer?, FP Markets
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