Finance

FOMC Minutes Signal Fed Ready To Hike Above 'Neutral', Backs Multiple 50bps Hikes

FOMC Minutes Signal Fed Ready To Hike Above ‘Neutral’, Backs Multiple 50bps Hikes

Tl;dr: Bloomberg’s ‘Sentiment of the Minutes Indicator’ suggests the minutes were just as hawkish as the last set, remaining nearly as hawkish as the Fed has tended to be the last 30 years

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Since the FOMC Statement and press conference on May 4th, a lot has changed…making the Minutes for that meeting somewhat ‘meh’.

In the three weeks since The Fed hiked rates and laid out its path for QT, US Macro data has serially disappointed at an almost unprecedented pace… led by ‘housing’, ‘labor’, and ‘survey’ data

Bonds, gold, and the dollar are all marginally changed since Powell’s presser (albeit amid notable volatility), but stocks have been clubbed like a baby seal as reality of recession or a Fed with no ‘put’ sunk in…

Source: Bloomberg

Interestingly, while financial conditions have tightened dramatically in recent months (to historically tightest levels of the last decade), since May4th, they have gone nowhere…

Source: Bloomberg

The odds of 50bps in June remains flat since the FOMC but the odds of 50bps in July has fallen notably in the last few days as stocks collapsed…

Source: Bloomberg

And once again the market’s collapse appears to have triggered hope for a Fed ‘pause’ (which we discussed as unlikely any time soon here)…

Source: Bloomberg

So, the market is watching today’s Minutes very closely for signs of that ‘pause’, for any hints on how the Fed could inject dovishness while staying the course regarding normalisation, perhaps by signaling a lower terminal rate… but bear in mind that all the carnage in stocks and macro data has occurred AFTER these Minutes.

Here’s what The Fed wanted you to take away from that meeting on May 3rd/4th…

ECONOMY

  • All Fed participants agreed US economy was ‘very strong/ labor market was extremely tight’ and inflation was very high

  • Fed participants saw Ukraine conflict China COVID lockdowns posing heightened risks.’ with particular challenges to restoring price stability while maintaining strong job market

  • Participants said Q1 22 GDP decline contained ‘little signal about subsequent growth.’ and they expected real GDP would grow ‘solidly’ in 02 and be near or above trend for the whole year.

INFLATION

  • A few participants added that some of their contacts were starling to report that higher prices were hurting sales.

  • Fed participants emphasized that they were highly attentive to inflation risks and agreed those risks were skewed to the upside.

  • These participants also emphasized that price pressures remained elevated and that it was too early to be confident that inflation had peaked

  • A number of participants observed that recent monthly data might suggest that overall price pressures may no longer be worsening

BALANCE SHEET

  • All participants supported plans to reduce size of Fed’s balance sheet:

  • A number’ said after runoff was well under way. it would be appropriate to consider sales of MBS.

RATES

  • Most Fed officials backed 50bps hikes at next couple meetings.

  • All participants at May policy meeting agreed half-percentage-point interest rate hike was appropriate

  • ‘Most’ judged such hikes appropriate at the next couple of meetings, regarding 50bps.

ECONOMY

  • All Fed participants agreed US economy was ‘very strong/ labor market was extremely tight’ and inflation was very high

  • Fed participants saw Ukraine conflict China COVID lockdowns posing heightened risks.’ with particular challenges to restoring price stability while maintaining strong job market

  • Participants said Q1 22 GDP decline contained ‘little signal about subsequent growth.’ and they expected real GDP would grow ‘solidly’ in 02 and be near or above trend for the whole year.

HOUSING

  • Residential house prices had risen rapidly, although the staff continued to see key differences from the previous debt-fueled housing boom: The mortgage finance reforms enacted after 2008 limited the potential for significant deterioration in underwriting standards, most new mortgage debt had been added by borrowers with prime credit scores, and homeowners’ equity positions were healthy.”

DEMAND DESTRUCTION

  • Most participants indicated that their business contacts had continued to report that substantial increases in wages and input prices were being passed through into higher prices to their customers.

  • A few participants added that some of their contacts were starting to report that higher prices were hurting sales.

  • But a number of participants observed that recent monthly data might suggest that overall price pressures may no longer be worsening

FINANCIAL STABILITY

  • Several participants who commented on issues related to financial stability noted that the tightening of monetary policy could interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector’s intermediation capacity.

  • A couple of participants pointed to increased risks in financial markets linked to commodities following Russia’s invasion of Ukraine, which had led to higher prices and volatility across a wide range of energy, agricultural, and metal products.

  • These participants observed that the trading and risk-management practices of some key participants in commodities markets were not fully visible to regulatory authorities and noted that central counterparties (CCPs) needed to remain capable of managing risks associated with heightened volatility or that margin requirements at CCPs could give rise to significant liquidity demands for large banks, broker-dealers, and their clients.

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Read the full FOMC Minutes below:

Tyler Durden
Wed, 05/25/2022 – 14:05

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