Cautiously Optimistic

MACRO MARKETS

This Wednesday, we got the minutes from the last FOMC. Minutes always help get a deeper understanding of what the Fed thinks about and what other committee members have to say. It also helps show if people are unanimously voting on certain decisions or if there is a break between voting.

The FOMC minutes showed that the fed expects rate increases to fight inflation to their 2% target level. There was a unanimous vote on 25bps, although some did mention that they might want a 50bp hike.

according to the FOMC minutes, “Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time.” They did say that an “insufficiently restrictive” policy stance could stall recent progress on moderating inflation pressures, suggesting they are prepared to move rates up further than their December forecast of 5.1%. The market is pricing at around 5.375% currently.

In a CNBC interview Wednesday, Bullard repeated his belief that going higher sooner would be more effective. Even with his push for a more aggressive near-term policy, he thinks the peak or terminal rate should be around 5.375%, in line with market pricing. Some may just want the hike to be upfront rather than the market pricing of 25bps.

There is a concern by the officials that there is a lot of work left to be done, but they did recognize that we have got some trending lower inflation data recently. The consumer price index rose 0.5% from December and is up 6.4% from last year. The producer price index, which measures input costs at the wholesale level, rose 0.7% on the month and 6% annually. Both readings were above Wall Street expectations. The labor market also is hot, indicating that Fed hikes, while hitting the housing market and some other rate-sensitive areas, have yet to seep through too much of the economy.

There wasn’t a great deal of new information. The most notable takeaway was that a few participants saw a case for a 50 bp hike in February, although the support for the 25 bp move was unanimous. The minutes suggest a wait-and-see approach as they remain data-dependent. Should inflation continue to climb, enough voting members could push for a 50 basis-point move.

The market reacted with volatility and uncertainty, rallying post-news to drop down and consolidate after that. Rates kept up with their move higher as well.

Surprisingly the Bloomberg sentiment indicator showed this to be a very dovish meeting, although the market overall did not react like that.