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

Courtesy of ZeroHedge View original post here.

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…

On Multiple 50bps Hikes:

Most participants judged that 50 basis-point increases in the target range would likely be appropriate at the next couple of meetings. Many participants judged that expediting the removal of policy accommodation would leave the committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”

On 'Peaking' Inflation:

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

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

On the housing market:

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.”

On QT trajectory:

"A number" were in favor of selling MBS."

"A number of participants remarked that, after balance sheet runoff was well under way, it would be appropriate for the Committee to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities."

On QT impact:

"Several" were worried QT could cripple Treasury liquidity

"Several participants… 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"

"Any program of sales of agency MBS would be announced well in advance. Regarding risks related to the balance sheet reduction, several participants noted the potential for unanticipated effects on financial market conditions."

On Russia's impact on financial markets:

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.

And finally, everyone remains uncertain about everything:

Participants agreed that the economic outlook was highly uncertain and that policy decisions should be data dependent and focused on returning inflation to the Committee's 2 percent goal while sustaining strong labor market conditions.

At present, participants judged that it was important to move expeditiously to a more neutral monetary policy stance. They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.

Participants observed that developments associated with Russia's invasion of Ukraine and the COVID-related lockdowns in China posed heightened risks for both the United States and economies around the world. Several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labor market conditions.

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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Read the full FOMC Minutes below:


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