To The Moon

The February FOMC meeting minutes of the Federal Reserve emphasized the determination to continue fighting against inflation, with officials still very concerned about inflation. The tight labor market continues to put upward pressure on wages and prices. Some officials hope to raise interest rates by 50 basis points, while others believe that the risk of an economic downturn is increasing and the debt ceiling issue also poses a risk. 

As a result, US stocks and bond prices narrowed their gains, with the $DJIA(.DJI)$ and $S&P 500(.SPX)$ turning lower in the last hour of trading.

St. Louis Fed President Bullard reiterated the need to raise interest rates to a peak of 5.375% as soon as possible, citing data showing that the US economy is more resilient than expected. He and Cleveland Fed President Mester admitted last week that they had recommended a 50 basis point rate hike in February and will continue to recommend a substantial 50 basis point rate hike in March. Bullard said that aggressive rate hikes are needed now to ensure that inflation is defeated this year.

The latest meeting minutes show that Federal Reserve officials expressed at the recent meeting that there are signs that inflation is decreasing, but not enough to offset the need for further rate hikes. 

Although raising rates by 25 basis points is a consensus, a few officials support raising rates by 50 basis points. According to FedWatch, the probability of a 25 basis point rate hike in March has dropped by 15% compared to a week ago, while the probability of a 50 basis point rate hike has increased by 15%.

After this meeting, the Federal Reserve announced that it has decided to slow down the rate hike for the second time in a row, indicating that it will still raise interest rates. 

Unlike the previous one, this rate guidance stated that when determining the future degree of interest rate hikes, a series of factors such as the lagged effects of interest rate hikes should be taken into account, while the previous one stated that these factors should be taken into account when determining the future speed of interest rate hikes.

Additionally, this time, the minutes added that while inflation is still high, inflation has eased to some extent. The market thus believes that this decision is dovish, indicating that the rate hike action is approaching its end.

The meeting minutes on Wednesday showed that although all Federal Reserve officials present at the meeting voted to support a slower rate hike to 25 basis points, a few officials were inclined to raise interest rates by 50 basis points at the time. The minutes stated that the participating Fed decision-makers unanimously believed that there were signs that the cumulative effect of the FOMC tightening monetary policy had begun to ease the upward pressure on inflation, but the inflation rate is still far above the FOMC's long-term target of 2%.

The supply of the US labor market is still very tight, resulting in continued wage and price increases.

The interest rate market predicts that a 25 basis point rate hike by the Federal Reserve in June is almost certain, with the probability of a 25 basis point rate hike at each of the next three meetings close to 100%. The rate of the overnight index swap (OIS) contract, which expires in June, has risen to 5.323%, nearly 75 basis points higher than the current level. The market also expects the peak interest rate to be higher than before, approaching 5.40% in July, higher than the 5.1% projected in the December dot plot.

When assessing the uncertainty of economic and inflation prospects, Fed officials at the meeting pointed out that there are several factors that could pose upward inflation risks, such as price pressures that may be more persistent than expected, the time of labor market tightness may be longer than expected, and some foreign factors, such as China's optimized epidemic prevention policies and the ongoing Russia-Ukraine conflict.

However, some participants said that the risks to their inflation outlook have become more balanced.

The participants agreed that the outlook for economic activity faces downside risks. They noted that the sources of such risks include the possibility that the economy could slip into a downturn due to unexpected negative shocks in an environment of weak growth, the impact of major central banks synchronously tightening monetary policy, and disruptions to the financial system and broader economy because the US statutory debt ceiling may not be raised in a timely manner. When discussing risks to financial stability, several officials also emphasized that the lengthy negotiations to raise the debt ceiling could pose significant risks to the financial system and the broader economy.

This uncertainty in the economic and inflation outlooks has led to differing views among Fed officials regarding the appropriate course of action for monetary policy. Some officials are pushing for more aggressive rate hikes to combat inflation, while others are concerned about the potential negative impact on economic growth and the risks posed by issues such as the debt ceiling.

Despite these differences, the Fed has signaled its commitment to continuing to take action to address inflation and maintain stability in the economy. This includes the recent decision to slow the pace of rate hikes, while also leaving open the possibility of further increases in the future.

Looking ahead, the Fed's decisions on monetary policy will continue to be closely watched by investors and economists around the world, as they have significant implications for global financial markets and the broader economy. Factors such as inflation, labor market conditions, and geopolitical risks will all play a role in shaping the Fed's thinking and its decisions going forward.

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