In the eyes of many industry insiders, the January interest rate decision announced by the Federal Reserve three weeks ago is the most hawkish interest rate meeting of the Fed in recent years. At the turning point in the tightening era, the Fed not only completely changed the policy statement of the time, but even deleted the pro-economic commitments that the statement had shouted for many years at the beginning. Fed Chairman Jerome Powell threatened at the post-meeting press conference that the possibility of raising interest rates at every future policy meeting was not ruled out...
It is precisely affected by Powell's "change into the eagle king mask, foot on the stock and debt bulls" interest rate night, many industry insiders earlier this week also expected that the Minutes of the Fed's January meeting, which will be released on Wednesday, will reveal more details of the Fed's aggressive interest rate hikes and even balance sheet reductions.
However, they were no doubt disappointed by last night's final result – perhaps because the night of the debate had already sacrificed all the killer skills, and in the latest release of the minutes, the Fed failed to reveal more valuable information, and the content of the minutes was basically consistent with the hawkish signals released on the night of the discussion.
Fed policymakers agree that with the growing impact of inflation on the economy and a strong job market, it's time to tighten monetary policy. But they also said any decision would depend on the analysis of the data at each meeting. In addition, although the minutes signaled a possible March rate hike, it did not reveal any clues that a 50 basis point hike might be made at a time, nor did it mention more details such as the timing of the balance sheet reduction.
As a result, many strategists said the minutes suggest that Fed policymakers may not be as hawkish as many investors fear!
Summary of the minutes of the Fed's January meeting
Changes in interest rates
Fed officials at their January monetary policy meeting argued that they should raise interest rates as soon as possible and remain vigilant against high inflation, or accelerate the pace of tightening if necessary, the minutes show.
Participants discussed the impact of the economic outlook on the possible timing and pace of eliminating policy easing. Most of the officials in attendance believed that if the economy generally met the commission's expectations, the target range for the federal funds rate could rise faster than after 2015. Compared to what had been the case in 2015, participants felt that the outlook for growth in economic activity was much stronger, with a significant increase in inflation and a marked tightening of the labour market. They also expect that it will soon be suitable to raise the target range of interest rates.
It was also stressed, however, that the appropriate policy path would depend on changes in the economic and financial situation, as well as their impact on the economic outlook and the risks associated with the outlook. At each meeting, they will update their assessment of the suitability of the monetary policy stance to the environment.
Taper process
Given high inflationary pressures and a strong labour market, participants continued to believe that the Commission should complete its net asset purchase program as soon as possible. Most attendees preferred to continue to reduce asset purchases in accordance with the timeline announced in December, ending bond purchases by early March.
However, several attendees said they preferred to end the asset purchase program earlier in order to send a stronger signal that the Fed was committed to lowering inflation.
Shrink table schedule
In its Monetary Policy Statement in January, the Fed expected the balance sheet reduction to take place after the rate hike was launched, and also proposed plans to drastically reduce the size of its balance sheet over time, such as holding mainly U.S. Treasuries in the long term, which means that the Fed could slash its current holdings of $2.7 trillion in mortgage-backed securities. Although the latest minutes reiterated the above statement, they did not reveal more details.
The minutes of the meeting showed that participants argued that a significant reduction in the size of the balance sheet might be appropriate given the current high size of the Fed's securities holdings. The Fed's balance sheet schedule will be determined at an "upcoming meeting." The minutes also noted that "some participants believe that the situation may support the start of balance sheet reduction later this year." ”
In addition, many participants believed that at some point in the future, it might be appropriate to sell institutional MBS, or reinvest the principal received by some institutional MBS in U.S. Treasury bonds, so that the composition of SOMA's portfolio could be transformed into a U.S. Treasury bond.
Inflation and employment representations
The minutes showed that participants agreed that uncertainty about the inflation path was rising and inflation risk was trending upwards. Most participants noted that if inflation did not fall as they expected, it would be appropriate to withdraw easing faster than they currently expected.
On the employment front, many participants said they believed that labour market conditions were at or very close to maximum employment and cited a number of signs of a strong labour market, including low levels of unemployment, rising wage pressures, near-historical levels of job openings and job resignations, and widespread worker shortages in many sectors of the economy.
Still, some participants argued that in their view the economy may not have reached its maximum employment. They point out that even for prime-age workers, the labor force participation rate is still lower than before the pandemic, in other words, the redistribution of labor in various sectors over time could lead to higher levels of employment.
Investment banking agency interpretation: the minutes are not hawkish enough
Overall, while the Fed minutes underscore the importance of being flexible, there are no new clues about the expected rate hikes or balance sheet reduction plans for March, which has led investors to generally believe that the minutes are less hawkish than previously expected.
After the release of the minutes of the meeting, the S&P 500 recovered the intraday losses on the same day, and the yield on the 2-year US Treasury note, which is more sensitive to the Fed's policy actions in the short term, also fell rapidly, and the dollar index in the foreign exchange market also finally fell on the same day.
Bank of Montreal capital markets Ian Lyngen noted that the Fed minutes offer little new — the Fed didn't discuss a 50 basis point rate hike, and the tone of its balance sheet plan wasn't surprising, meaning "the minutes were more dovish relative to expectations." As a result, the market moved higher.
Simona Mocuta, chief economist at State Street Global Investment Management, said, "Frankly, I think the Fed is a bit of a tailspin. There's been too much hike hype in the market lately and I think everybody's ready minutes will take a very hawkish tone, and the minutes are more like saying, 'Of course we're going to do this, but we're going to walk before we run.'" ’”
Matt Maley, chief market strategist at Miller Tabak & Co., also believes the Fed leaves more room for a more aggressive withdrawal of stimulus measures in the future. But they seem to be telling us that the Fed will not violently raise rates in March.
Paul Ashworth, chief U.S. economist at Capital Economics, commented that Fed officials do not appear to have seriously considered whether to start a tightening cycle with a 50 basis point rate hike or to raise rates once in the remaining seven meetings of the year.
In the American media circles, the Wall Street Journal is often seen as the Fed's "mouthpiece." After the Release of the Fed Minutes, the newspaper also noted in an opinion piece that "discussions show that officials are more comfortable raising interest rates in successive policy meetings, something they haven't done since 2016, which are held about every six weeks." This means that there may be a series of hikes in March, May and June. “
The Wall Street Journal also noted that "the Jan. 25-26 minutes also show that officials continue to discuss how to aggressively scale back its $9 trillion portfolio, but provide no new clues as to how they might do so later this year." The move is another way for the Fed to tighten financial conditions in order to cool the economy. ”
The March rate hike balance reschedes at 25 basis points
It is worth mentioning that from the market's bets, after the release of the Fed minutes overnight, industry insiders are beginning to re-lean toward the former for whether the Fed will raise interest rates by 25 basis points or 50 basis points in March.
Data from the interest rate futures market showed that the probability of a 50 basis point rate hike in March after the release of the minutes fell from around 70% earlier in the day to just under 50% at the end of the US stock market.
CME's famous FED WATCH indicator also shows that traders currently expect the Fed to raise rates by 25 basis points in March with a probability of 55.7%, and a 50 basis point hike probability of 44.3%.
This is undoubtedly a dramatic shift from last Thursday. At that time, as the US January CPI data broke 7 for the second consecutive month, traders expected the probability of the Fed raising interest rates by 50 basis points in March was close to 100%, and the market even speculated that the Fed might announce an emergency rate hike in advance in February.
But even leaving aside last night's hawkish Fed minutes, the likelihood of a 25 basis point rate hike in March instead of 50 basis points does seem to be relatively larger, judging from recent statements by Fed officials. Fed officials have been vocal about the strength of the rate hikes that will unfold at the March meeting since the January meeting, and almost no official has hinted at supporting a direct 50 basis point hike in March except for "Eagle King" Bullard.
All 84 respondents to the Feb. 7-15 Reuters survey expect the Fed to raise the federal funds rate by at least 25 basis points at its March 15-16 meeting. Only 20 of them — or nearly a quarter of respondents — expect the Fed to raise rates 50 basis points directly to 0.50-0.75 percent.
Of course, it is also important to note that since the Fed's January meeting was held before the US Bureau of Labor Statistics released its latest CPI and PPI data, and both of which were released significantly higher than market expectations, last night's minutes also seemed slightly outdated. Whether the Fed will raise rates by 25 basis points or 50 basis points in March may remain to be seen from more economic data and the statements of Fed officials.
John Doyle, vice president of trading at Monex USA, said: "In any case, we have reservations about this meeting minutes as this meeting preceded the release of the recently released CPI and PPI data, which were much higher than expected. Ian Shepherdson, chief economist at Pantheon Macroeconomics, also said that given that inflation and wage data were both worse than expected after the January meeting, the statements in the minutes did not represent a final conclusion.
Richmond Fed President Barkin recently said in a recent interview that it was "timely" for the Fed to start raising interest rates, but he also noted that the specific situation will still depend on the next inflation report. "Is it going to go back to levels more like we've seen over the last 30 years?" Or will it not fall back? "Depending on the answer, you can adjust your stride or timing." ”