Morning Brief – November Minutes: The good, the bad, and the ugly

Charles Porter
Thu 24 Nov 2022

Overnight, minutes from the latest Federal Reserve Bank’s Open Market Committee meeting were released. If you recall, the latest decision taken earlier this month produced a bumper 75 basis-point hike in US interest rates. However, the meeting was critical not only for the outcome of the decision but for any forward guidance that might come from the Reserve Chair Jay Powell. During that meeting, he came out with some relatively unimpressive comments other than one: the Fed’s terminal rate next year is likely to be higher than the market is currently pricing. In the press conference afterwards, the Chairman was provided with a somewhat misleading and baited question. He was told that the market’s reaction to the release had been to buy US debt across the yield curve lowering the implied expectation for the terminal rate. He was then asked what he thought of this reaction. Perhaps taking the bait, the Chairman provided his admonition to the market arguably swayed by the misleading commentary that preceded the question. 

The importance of and multiplicity of factors behind the November Federal Reserve decision made its minutes released last night all the more important. What it showed was a Reserve perhaps not quite as resolute behind the image of a higher than priced terminal rate. There was also the first signs of worry from members surrounding the economic damage that their inflation fighting programme may be inflicting. These minutes released last night attest to the fact that Fed officials see around a 50/50 chance of a US recession being forthcoming as a result of the credit constraining adjustments made by the central bank so far. This is important not just for the probability that policy makers shared during this meeting but also it is the first official time that the Reserve has acknowledged and published its concerns regarding economic growth. The Reserve has a mandate for primarily price control with a watchful eye over employment. It is clear from last night’s minutes that growth is also in their periphery. 

The conclusion from these minutes including the concerns over growth is that the Fed is likely to slow down the pace of policy adjustment as soon as the December meeting. With much of the developed world most recently still recording outsized hikes this gives optimism for financial conditions and valuations worldwide provided that moderating inflation readings are widespread and not isolated to the US alone. So far expectations for the December meeting have settled around a 50-basis point hike in rates before decelerating further in 2023. The US Dollar weakened significantly overnight with EURUSD approaching four-month highs once again. This Dollar weakness will help to solidify yesterday’s break of 1.20 in GBPUSD. However, risk conditions still remain highly vulnerable and any deterioration in sentiment could still cause sharp pullbacks in GBP. 

Discussion and Analysis by Charles Porter 

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