The Fed minutes met expectation

Spread the love

Almost all of the policymakers at the FOMC meeting in June agreed that it is wise to pause the interest rate hike for a moment while not forging future hike possibilities. This means investors should expect higher borrowing cost into the second half of the year.

Higher odds that July FOMC will see a further hike

While we saw a broad-based agreement on skipping rate hikes, the restrictive stance on monetary policy remains based on the latest FOMC minutes. This is attributed to the still elevated inflation rate, which suggests that an increase in the federal funds rate in 2023 will be necessary.

Monetary policy lag assessment

Indeed, the FOMC minutes, without surprise, focus on the need of the Fed to ascertain the cumulative effects of the massive interest rate hike thus far. While the vote on holding the rate steady was somewhat unanimous, some members will still advocate for a rate hike but are convinced of a “skip”.

These members’ concern was that the labour market remains too tight and hot, and economic activity was generally stronger than expected. Signs of inflation coming down fast were also lacking in evidence, as headline inflation remains a headache. Nonetheless, the PCE index did moderate recently (after the FOMC meeting), which could dilute some worry should the number continues to trickle downwards.

The median forecast by FOMC members

The expectation is for the federal funds rate to hit around 5.6% by the end of 2023, an increase from 5.1% based on the Fed’s revised Summary of Economic Projections. This hints at a possible 2 more 0.25% hikes. With that, market participants place around 88.7% odds that July will mark a quarter-point increase.

What about a recession that is our ultimate concern?

Despite the US showing resilience, the Fed staff still expect some level of recession hitting the US, but the impact could be a mild one, pointing to a generally termed “soft landing”, such that inflation cools in the absence of major economic contraction.

The banking sector remains the top concern of investors with the ongoing rate hike in place. Any weakness in the sector could lead to a credit crunch as lending becomes stricter.

What’s on the menu today?

8.15 pm : ADP Nonfarm Employment Change
8.30 pm : Initial Jobless Claims
9.45 pm : Services PMI
10 pm : ISM Non-Manufacturing PMI, JOLTs Job Opening

It is 6 July 2023, Thursday, 9 am in Singapore and 9 pm in New York. The market remains calm after the release of the minute, as expected. We have positioned higher-risk trades into the trading sessions and pared off most trades.

While today’s data is important, tomorrow’s labour data is the main ingredient of the week. So do stay light. We hope all friends have a prosperous trading week!