An upset in the minutes
Minutes of the Federal Reserve’s January meeting were published yesterday evening. As you may tell from the market reaction, the contents of such minutes were far from in line with market consensus. If you cast your mind back to January 28th, the FOMC voted 10-2 to keep rates on hold. That had followed on from three rate cuts last year and was offered in the context of a strong enough economy to wait and see how inflation progressed, whilst keeping a keen eye on a cooling labour market. Or so we thought..
The two dissenting votes were those of Christopher Waller and Stephen Miran, two of Trump’s nominees to the Fed, and both called for an immediate rate cut. The impression left following the decision and press conference was therefore one of a patient Fed taking its time before moving towards a more accommodative policy. Instead, the minutes published overnight attest to the fact that many Fed members see the possibility of a return to rate hikes should inflation prove persistent. In addition, many felt that the weakness observed in the labour market has begun to bottom out, limiting the need for further cuts.
In reaction the Dollar leapt higher. EURUSD within hours traded almost a cent lower versus its intraday highs in the preceding European session. There remains a bit of a chasm in pricing given that following the publication the market still sees a cut from the Fed before or at its July meeting and a further cut of 25-basis points at either the October or December meeting. The Dollar has therefore led the reaction based upon the promise of higher interest rates but the base case priced into Fed funds futures has been stickier.
Discussion and Analysis by Charles Porter
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