What impressed many people the most about the Fed's interest rate decision in early May is undoubtedly the Fed Chairman Powell's confident statement at the post meeting press conference that the Fed's next move is unlikely to be a rate hike.
However, the latest minutes of the Federal Reserve's May meeting released overnight showed that Powell's dovish stance at the time may have largely overshadowed the voices of hawkish officials. The minutes show that "many" Federal Reserve officials question whether the policy's limitations are sufficient to bring inflation rates down to target levels, and multiple officials have mentioned their willingness to further tighten policies if necessary
The release of this Federal Reserve minutes, which revealed the details of the meeting, directly led to widespread pressure on the US stock, bond, and commodity markets overnight. The market's expectations for the Federal Reserve's two interest rate cuts within the year were also significantly hit overnight
Did the Federal Reserve's minutes last night make a big mess?
According to the latest minutes of the Federal Reserve's May meeting, Federal Reserve officials generally stated at the last policy meeting that if inflation data continues to disappoint, interest rates may remain high for a longer period of time, and some policymakers even talked about their willingness to further raise rates when needed.
The minutes show that although participants believe that the current positioning of monetary policy is good, multiple officials have mentioned their willingness to further tighten policies when necessary. These officials stated that once inflation risks become a reality and it is appropriate to further tighten policies, they are willing to take such action.
The meeting minutes stated that "the attendees noticed that the inflation reading in the first quarter was disappointing. They need more time than previously expected to have greater confidence in continuing to move towards the 2% target for inflation.".
Regarding interest rate policy, officials believe that it is generally restrictive, but decision-makers point out that the impact of high interest rates on the economy may be smaller than in the past. They also stated that long-term neutral interest rates may be higher than previously imagined. "Many attendees expressed uncertainty about the degree of restrictions."
The issues discussed by officials also include maintaining interest rates stable for a longer period of time if inflation rates do not show signs of continuing to move towards 2%; If the labor market situation unexpectedly weakens, reduce policy restrictions.
Federal Reserve Chairman Powell stated at a press conference on May 1st that current monetary policy is clearly restrictive, and over time, he expects the current interest rate level to lower inflation to the Fed's target of 2%. He also added that the next step for the Federal Reserve is unlikely to be a rate hike.
Powell reiterated at an event held in Amsterdam on May 14th, "We need to be patient and let restrictive policies work."
Obviously, the latest meeting minutes provide a more nuanced description of the true view of the current interest rate situation within the Federal Reserve.
Subadra Rajappa, head of US interest rate strategy at Faxing Bank, said, "The meeting minutes seem to be more hawkish than what we heard from Powell at the post meeting press conference. They (Federal Reserve officials) seem to be clearly concerned about inflation, and they are more open to raising interest rates if necessary, which means maintaining a policy of high interest rates for a longer period of time."
Torsten Slok, Chief Economist of Apollo Global Management, also stated that the meeting minutes were indeed "somewhat inconsistent with the content of the Powell press conference.".
US stock, bond, and commodity markets all fell together
Due to the latest minutes of the Federal Reserve showing persistent concerns about inflation and raising more questions about whether Fed officials will raise interest rates again and when they may cut rates, the US financial markets have generally been under pressure since the release of the minutes on Wednesday.
As of the close, the S&P 500 index fell 0.3%, and the Nasdaq Composite index fell 0.2%. Both indices closed at historical highs on the previous trading day. The Dow Jones Industrial Average fell by about 200 points, a decrease of 0.5%, marking the worst single day performance of the month and giving back a week's increase.
From the overall trend throughout the day, the stock market lacked direction for most of the session, but it clearly weakened after the release of the minutes of the Federal Reserve meeting.
In the bond market, the yield of US Treasury bonds with different maturities mostly rose overnight. Among them, the 2-year US Treasury yield increased by 4.1 basis points to 4.88%, the 5-year US Treasury yield increased by 2.9 basis points to 4.469%, the 10-year US Treasury yield increased by 1.1 basis points to 4.428%, and the 30-year US Treasury yield decreased by 1.1 basis points to 4.541%.
The US Treasury Department auctioned US $16 billion of 20-year treasury bond on Wednesday, with the winning interest rate of 4.635%, close to the yield level of the secondary market before the auction. The bidding multiple is 2.51, the lowest since February.
While both US stocks and bonds are under pressure, the volatile "periodic table" trend in the commodity market has also stalled recently. On Wednesday, spot gold prices fell sharply, marking the largest daily decline since April; Copper also fell by more than 4%, with the New York copper market hitting a historic high falling by over 6% at one point.
All of this happened against the backdrop of the US dollar's rebound. Due to the hawkish nature of the Federal Reserve minutes, the ICE US dollar index, which tracks the exchange rates of a basket of six major currencies including the US dollar against the euro, rose above 104.90 on Wednesday, rising about 0.3% on the day and rebounding to a one week high.
Amarjit Sahota, head of foreign exchange risk management company Klarity FX in San Francisco, said, "The meeting minutes confirm what most traders were already thinking about a week ago before the release of the US CPI report, which means...", FOMC members are increasingly frustrated with disappointing inflation data in the first quarter, and some officials are willing to further tighten policies, which further boosted the US dollar after the release of meeting minutes
From the perspective of pricing in the interest rate market, after the release of the Federal Reserve minutes on Wednesday, traders currently only expect the Fed to cut interest rates by 40 basis points within the year - whether two rate cuts can be achieved has become quite uncertain again.
Of course, what may still provide some investors with comfort for now is that this latest disclosed meeting minutes only reflect the internal discussions during the Federal Reserve meeting three weeks ago. Last week, the core CPI in the United States saw a resurgence of interest rate cuts after six months, and the level of industry concern about the inflation situation is no longer as severe as when the Federal Reserve met. This may also indicate that although this summary may appear more hawkish at first glance, its impact on the market may not be long-lasting, especially given that the focus of the stock market has shifted towards Nvidia's financial reports.
The next interest rate meeting of the Federal Reserve will be held from June 11-12 local time, at which time the Federal Reserve will release its latest interest rate chart forecast. There may be clearer answers to the question of how the Federal Reserve will cut interest rates this year and how many times it will do so.