The minutes of the November meeting released by the Federal Reserve in the early hours of Beijing time on Wednesday showed that Fed officials unanimously agreed at the previous policy meeting that they would act "cautiously" and only raise interest rates when progress in controlling inflation falters. Meanwhile, Federal Reserve officials still did not give any hints of interest rate cuts in the latest meeting minutes.
The meeting minutes show that all attendees agree that FOMC should act with caution. The meeting minutes stated that participants expect the data to be released in the coming months to help clarify the extent to which inflation has continued to decline despite rising borrowing costs.
Many industry insiders pointed out after the minutes were released that the minutes seem to indicate that support for more rate hikes within the Federal Open Market Committee (FOMC) is dissipating, and the baseline is shifting towards maintaining benchmark interest rates stable without serious inflation surprises.
Nick Timiraos, a renowned journalist known as the "New Federal Reserve News Agency," commented that when Federal Reserve officials decided to extend the suspension of interest rate hikes earlier this month, they were not willing to conclude that the hike had been completed. But the minutes of their latest policy meeting indicate that they may be willing to maintain interest rates unchanged for at least the rest of this year.
What are the subtext of the Federal Reserve minutes?
The inflation data in the United States has been slowing down recently - the October CPI data released earlier this month exceeded expectations and fell back to 3.2%. Although the Federal Reserve has not yet announced the end of its struggle to curb rapid price increases, the tone of discussion has gradually shifted to focusing on how long to keep policy rates within the current range of 5.25% -5.50%.
The latest meeting minutes mention that "participants pointed out that if the information received indicates insufficient progress in achieving the committee's inflation target, further tightening of monetary policy would be appropriate." This wording indicates that a certain degree of unexpected shock will be required to prompt further interest rate hikes.
This sentence did not appear in the last September meeting minutes of the Federal Reserve, and the addition of this sentence is not particularly biased towards hawks. Because in the September meeting minutes, the "majority of attendees" still believed that in the tightening cycle that had pushed policy interest rates up by 525 basis points in the past 20 months, another rate hike was still needed. In contrast, the latest meeting minutes show that all participants believe that maintaining the current interest rate setting is appropriate.
Undoubtedly, the Federal Reserve's stance on interest rate policy will be further clarified at the final interest rate meeting of the year on December 12-13, when decision-makers will release a new set of interest rate charts and economic forecasts.
The minutes of the meeting also showed that Federal Reserve policymakers are working hard to address conflicting economic signals that make the risks facing the economy "more twofold" - a resurgence of inflation remains a concern, but they are also concerned that excessive tightening of credit could harm the economic outlook.
The US economy just recorded a super high annualized growth rate of 4.9% in the third quarter, which seems to trigger inflation again. But the tightening of financial markets has driven up credit rates for households, businesses, and the US government, potentially suppressing economic and employment growth beyond the level required to restore inflation to the Federal Reserve's 2% target.
The minutes of the meeting showed that "participants commented on the significant tightening of financial conditions in recent months, driven by the rise in longer-term yields.
This also echoes a major highlight of the Federal Reserve's resolution statement in early November. The biggest difference between the meeting and the previous September resolution was the first emphasis on the possibility of a tightening financial environment affecting economic activity and inflation.
Meeting minutes display,& Quot; Participants emphasized that long-term returns may fluctuate, and the factors behind the recent increase in returns and their sustainability are still uncertain. Therefore, it is very important to continue to closely monitor market dynamics& Quot;.
Overall, Federal Reserve officials believe that the risks of excessive and insufficient interest rate hikes are more balanced compared to earlier this year. This summary also reiterated the previous wording, which stated that due to inflation still far exceeding the Fed's long-term target of 2% and labor market tension, most participants continue to believe that there is a risk of inflation rising.
Market response was lackluster
This summary document has caused almost no violent reaction in the financial markets, which largely indicates that the market has accepted the view that the Federal Reserve has completed rate hikes, although the official level of the Federal Reserve will still not make a clear statement about this until more officials are confident that inflation will not rebound.
The contracts linked to the federal funds rate continue to show a near zero possibility of further interest rate hikes. According to the Federal Reserve observation tool of Chishang Exchange, the probability of the Federal Reserve cutting interest rates at its meeting from April 30 to May 1, 2024 has slightly increased from about 57% before the release of the meeting minutes to about 60%.
After the release of the meeting minutes, the US stock market closed slightly lower, the US dollar rose slightly against a basket of currencies, and the yield of US treasury bond bonds fell slightly.
As of the end of the New York session, yields on various maturities of US Treasuries generally declined slightly. The two-year yield fell 3.4 basis points to 4.883%, the five-year yield fell 3.7 basis points to 4.406%, the 10-year yield fell 2.8 basis points to 4.395%, and the 30-year yield fell 2.2 basis points to 4.551%.
According to an industry natural language processing model, the wording of recent Federal Reserve documents still shows a hawkish bias - although it is gradually leaning towards neutrality.
Overall, since the Federal Reserve resolution on November 1st, the US dollar has fallen by more than 3% and has driven stocks, bonds, and Bitcoin higher (and so has gold, albeit by a small margin)
The expected changes in interest rates have clearly become more moderate, and it is expected that interest rates will be cut earlier in 2024 (by nearly 100 basis points by the end of next year)
The yield curve has also significantly flattened (inverted again)
Perhaps the most noteworthy is that since the Federal Reserve emphasized that the market is "fulfilling its responsibilities" (by tightening the financial environment), the macroeconomic data in the United States has been disappointing one after another, and the financial environment has become significantly more relaxed
Regarding the latest Federal Reserve minutes, Ian Lyngen, a capital markets strategist at Bank of Montreal, said: "The overall tone of the FOMC minutes is cautious hawkish - the commitment to maintain a restrictive stance for a 'period of time' is the most obvious revelation
Anyway, industry insiders generally say that this week's Federal Reserve minutes released before the Thanksgiving holiday in the United States only indicate once again that there is a cautious and wait-and-see sentiment currently prevailing within the Federal Reserve. Although some hawkish officials have always been "using their mouths to raise interest rates," few believe they will take action. Federal Reserve Chairman Powell also extensively used the term 'cautious' in describing the central bank's efforts to balance the feeling of still high inflation and imminent economic slowdown at the previous press conference.
There are good reasons for caution, and the Federal Reserve may be about to accomplish an unexpected task - to step out of its worst inflation peak in 40 years without causing significant harm to the economy. However, policy makers are not yet interested in announcing victory and will not provide investors with too much direct guidance on what will happen next.
Inflation has given us some illusions. If further tightening policies become appropriate, we will not hesitate to do so, "Powell said at an International Monetary Fund research conference earlier this month