Market Insight – Fed Minutes breakdown

The release of the FOMC meeting minutes showed 50 basis points again, and some Fed members wanting rates to be hiked interest rates are now seen peaking in the 5.25-5.5% range in June.

Money markets imply around a 30% chance that they go an extra 25 bps higher to the 5.50-5.75% range by July. This triggered a rally in the US Dollar Index and US treasury yields, particularly at the short end of the curve, and has been weighing on US stocks as of late.

The meeting minutes said that FOMC members expect further increases to interest rates will be necessary to ensure that inflation comes sustainably back to the 2.0% target.

Inside the release, it stated that “Almost all” FOMC members backed the slowdown to 25 basis points rate hikes and “Upside risks to the inflation outlook remained a key factor shaping the policy outlook.”

The minutes stated, while a few officials warned that “insufficiently restrictive” stance could hamper progress on bringing down inflation.

The latest Fed meeting minutes release comes after financial markets have spent the last few weeks increasing their Fed tightening bets, as seen by the Fed funds rate.

In late January, most analysts were forecasting just two more 25 basis points interest hikes and one at the February meeting, which was delivered, and then a final one at the March meeting.

Some market participants were even betting that the 25 basis points rate hike in February might be the Fed’s last this cycle.

That was represented by the fact that, at the time, the money market implied the probability of no rate hike in March, and rates remaining in the 4.50-4.75% range, was around 20%, as per CME data.

Basically, this month’s string of stronger/hotter-than-expected US data releases, including the January jobs report, CPI report, and ISM PMI survey results, has triggered a big shift in the market’s expectations.