Fed Minutes in Focus

Yesterday evening saw the release of the FOMC’s minutes from their latest policy meeting on 26 July which showed most policy makers still saw “significant upside risks to inflation”. This came as the Fed  met expectations by raising rates 25bps, bringing the benchmark target rate to 5.25%-5.5, its highest rate in 22 years. With markets speculating on whether the Fed have reached their terminal rate, the minutes expressed some hawkish undertones, stating that persistent inflation “could require further tightening of monetary policy.” Such rhetoric was reiterated in Powell’s speech following the rate decision where the Fed Governor maintained that the CB would remain “highly attentive to inflation risks” and “continue to assess additional information and its implications for monetary policy”. As such, Powell concluded “I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted”.

The minutes also showed that two Fed officials “could have supported” keeping rates unchanged, proving some dovish undertones. Here, the minutes stated that “they judged that

maintaining the current degree of restrictiveness at this time would likely result in further progress toward the Committee’s goals”. Hence, with inflation coming down in line with projections and just 1.3 percentage point off their target level, some policy makers consider monetary conditions to be sufficiently tight. However, given that US growth appears to remain resilient in light of monetary tightening and was considerably stronger-than-expected over Q2, some policy markers remain concerned that the world’s largest economy potentially remains too hot.

At the back end of last week, money markets were pricing in around a 22% chance of a 25bps hike between now and November, with this being upwardly revised to a 28% chance yesterday. Presently, implied money markets expectations are now projecting around a 32% chance of a 25bps rate hike between now and November. As such, the general market consensus is pointing to the notion that the Fed have likely achieved their terminal rate.