InvestorQ : What were the key highlights of the US Fed minutes announced on Thursday?
Moii Chavate made post

What were the key highlights of the US Fed minutes announced on Thursday?

Tisha Malhotra answered.
1 month ago

When the Fed minutes were announced, the only debate in the minds of watchers was whether the July rate hike would 50 bps or 75 bps. If you go by the CME Fedwatch data points, it looks most likely to repeat the 75 bps rate hike in the July FOMC meet too. Subsequently, the rate hikes would most likely taper to 50 bps in September and 25 bps after that. FOMC looks all set to achieve the target of 3.50% interest rates by end of the year 2022. However, there has been some of lowering of rate hike expectations at long end.

We will go much beyond the neutral, was the stance of Jerome Power in recent interactions. The Fed neutral rate currently stands at 2.5%, which represents the rate up to which inflation can be regulated, without impacting GDP growth. However, once rates cross that level, then GDP is likely to see sharp fall, even into negative territory. The US economy has already dipped into -1.6% contraction in the March quarter and likely to fall further to -2.1% in the June 2022 quarter. But, 90 bps above the neutral rate looks on the cards.

To summarize, the short term stance of the Fed remains very hawkish. The Fed is willing to hike rates by 50-75 bps in July and September 2022 meetings and has held on to the stance that it would go well beyond the neutral rate. However, Fed is also not going to relent on the hawkishness unless inflation falls to 2% levels. However, some of this fall in inflation may have effectively happened during the commodity price meltdown in the last few days. The key would still be the PCE inflation, which could stay around 5.3% for the current year.

FOMC has to manage inflation expectations, before managing inflation. It has to show that the Fed was dead serious about curbing inflation and will not rest till it is down to 2%. This creates a rather piquant situation where the yield curve has inverted with the 2 year bond yields quoting higher than the 10-year yields. However, market data is indicating that, despite the strong rhetoric of the Fed, it is likely to undergo a change of heart very soon; in 2023, if not in 2022.