Evening Brief – 10.11.23
FOMC Minutes Reflect Two-Sided Debate
The minutes of the September FOMC meeting, released on Wednesday, echoed the hawkish tone of the statement and press conference that followed the decision last month to keep the Federal funds rate in a range of 5.25% to 5.50%, noting that “a majority” of Fed officials indicated one more rate hike “would likely be appropriate.”
Since the September 20 meeting, when several Fed members released their now-famous hawkish Summary of Economic Projections (dot plot), volatility has dramatically picked up across asset classes.
The dollar is somewhat stronger, but everything else is falling in value, with bonds and gold leading the way. Since the hawkish remarks, the STIRs (short-term interest rates) curve has risen by roughly 10 basis points, lending credence to the ‘higher for longer’ narrative.
The long end of the yield curve has increased considerably in the weeks since the last meeting. During the same period, the 2-year US Treasury yield fell by eight basis points, while the 30-year US Treasury yield increased by 33 basis points. That is a significant steepening of the curve.
Finally, financial conditions have deteriorated significantly (albeit the recent two days of flight to safety post-Israel have softened it slightly).
Since the hawkish dot-plots, various Fed speakers have attempted, albeit modestly, to soften the tone. Powell’s opening remarks at the news conference were somewhat balanced last month, so it’s not surprising that the minutes had more statements of risk.
The minutes, perhaps, reflect a more two-sided policy debate (pause versus additional hikes, or no hikes versus cuts) than the tone of the statement and press conference, but most participants continued to view upside risks to inflation.
On policy, “a majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted.”
On the economy, “a vast majority of participants continue to judge the future path of the economy as ‘highly uncertain.” The Fed staff assumed GDP growth for the remainder of 2023 would be damped a bit by UAW strike, with effects unwound in 2024.
And for anyone who thinks the central bank does not keep an eye on stocks: “US financial conditions tightened, with higher longer-term rates, lower equity prices, and a stronger dollar contributing roughly equally to the increase in various financial conditions indexes.”