Interpretation of the minutes of the Fed's FOMC meeting in May
The Fed's FOMC released the minutes of its May monetary policy meeting. Most Fed officials support a 50 basis point rate hike in the next few meetings. They believe that a sharp rate hike will provide policy flexibility later this year. All officials support the requirement. Start a reduction plan.
The minutes were seen as in line with market expectations, while suggesting flexibility for subsequent rate hikes, as officials raised their PCE inflation forecasts for the first half of this year and next year, commenting that it suggested three more 50-basis-point rate hikes by the Fed would be over.” water."
Here are the highlights from the minutes:
1. Q2 economy will grow "solidly", suggesting a stronger path of interest rate hikes
All participants agreed that the US economy is "very strong/labor market very tight" and inflation is very high.
Officials see the conflict in Ukraine and lockdowns in Asian countries posing higher risks, presenting particular challenges to maintaining strong employment while restoring price stability. Participants said the GDP decline in the first quarter of 2022 contained "small signals about subsequent growth." They expect real GDP growth in the second quarter to be "solid" and close to or above the full-year trend.
The following passage aroused the attention of the market:
Officials at the meeting agreed that the economic outlook is highly uncertain and that policy decisions should be data-dependent and focused on how to reduce inflation to the Fed's 2 percent target while maintaining a strong labor market environment. At the moment, participants felt it was important to quickly shift the stance of monetary policy to neutral. They also noted that a restrictive policy stance is likely to become appropriate depending on the changing economic outlook and risks.
This could signal the Fed's intention to raise rates more aggressively.
2. It is appropriate to consider selling MBS
All the officials in the meeting supported the plan to reduce the size of the Fed's balance sheet. Some participants said it would be appropriate to consider selling mortgage-backed securities (MBS) once the debt reduction is well underway, so that the SOMA portfolio would be dominated by U.S. Treasuries over the long term. Any plans to sell agency MBS will be announced in advance.
The current plan to shrink the balance sheet shows that the Fed did not choose to actively sell to shrink the balance sheet, but did so by adjusting the reinvestment scale of the mature principal of the securities held by SOMA.
3. Support raising interest rates by 50 basis points each at the next several meetings, pre-buying the foreshadowing of policy adjustments
All officials agreed at the May meeting that a 50-basis-point hike was appropriate, and most officials supported 50-basis-point hikes at the next several meetings.
Many participants predicted that an accelerated withdrawal of supportive monetary policy would put the committee in a good position later this year to better assess the impact of policy tightening and the extent to which economic developments could support policy adjustments.
The remarks are considered to be the Fed's hint at the flexibility of monetary policy at the end of the year.
4. Or suggest that three more 50 basis points of interest rate hikes will end the "water collection", and the focus turns to September
Some of the attendees added that some of their contacts said higher prices were hurting sales. Participants emphasized that they are highly concerned about inflation risks and agreed that these risks are skewed to the upside. The most recent monthly data may suggest that overall price pressures may no longer worsen, multiple officials at the meeting observed. But price pressures remain high and it is too early to believe that inflation has peaked.
The minutes of the meeting showed that Fed researchers raised their inflation forecasts. They estimated the personal consumption expenditures price index (PCE) to rise by 4.3% in 2022, but lowered their forecasts for 2023 and 2024 to 2.5% and 2.1%, respectively. Many attendees expected wage pressures to remain elevated for some time. This suggests that inflation forecasts submitted by Fed officials for their quarterly economic outlook, which will be updated next month, will be revised up.
Comments believe that the above expected adjustment is of great significance. Bloomberg strategist Vincent Cignarella believes that while most Fed officials agree to continue raising interest rates by 50 basis points in the next few meetings, because continued aggressive action will give the Fed the flexibility to turn at any time according to actual needs, the tightening may not be sustainable at all. long time.
Cignarell estimates that if the above PCE forecast is accurate, it would imply that three more 50-basis-point rate hikes by the Fed would end the current tightening cycle and pave the way for a big comeback in risk assets in the second half of this year.
Financial blog Zero Hedge said that at the September Fed meeting, we may see a turning point, and 3 CPIs between now and September may prove that inflation has slowed substantially. That may explain why Bostic also hinted earlier this week that the Fed might pause rate hikes in September.
It is worth noting that this year's mid-term elections in the United States will be held on November 8, and there will be four FOMC resolutions between now and before the election. Considering that the interest rate hike expectations in June and July have basically been set, the resolution in early November Too close to the election, the September meeting is politically and economically important.
5. The U.S. Treasury market faces liquidity risks, and commodity-related risks increase
Several participants who commented on financial stability-related issues noted that monetary policy tightening could affect financial stability, possibly interacting with vulnerabilities related to Treasury market liquidity and private sector intermediary capacity.
Some participants pointed to increased commodity-related financial market risks in the wake of the Russia-Ukraine conflict, which has led to higher and more volatile prices for various energy, agricultural and metal products. Participants noted that regulators do not fully understand the trading and risk management actions of some major players in commodity markets, noting that central counterparties (CCPs) need to maintain risk management in the face of higher volatility and higher margin requirements ability.
Before the release of the minutes of the Fed meeting, U.S. stocks weakened and turned lower, but after the minutes provided room for monetary policy flexibility in the second half of the year, U.S. stocks expanded their gains in late trading and refreshed their daily highs, and the Dow rose again. As of the close, the Dow rose for four consecutive days; the Nasdaq and the Nasdaq 100 both rebounded from the new low since November 2020 set yesterday; the S&P 500 closed up 37.25 points, or 0.95%.
The minutes were seen as in line with market expectations, while suggesting flexibility for subsequent rate hikes, as officials raised their PCE inflation forecasts for the first half of this year and next year, commenting that it suggested three more 50-basis-point rate hikes by the Fed would be over.” water."
Here are the highlights from the minutes:
1. Q2 economy will grow "solidly", suggesting a stronger path of interest rate hikes
All participants agreed that the US economy is "very strong/labor market very tight" and inflation is very high.
Officials see the conflict in Ukraine and lockdowns in Asian countries posing higher risks, presenting particular challenges to maintaining strong employment while restoring price stability. Participants said the GDP decline in the first quarter of 2022 contained "small signals about subsequent growth." They expect real GDP growth in the second quarter to be "solid" and close to or above the full-year trend.
The following passage aroused the attention of the market:
Officials at the meeting agreed that the economic outlook is highly uncertain and that policy decisions should be data-dependent and focused on how to reduce inflation to the Fed's 2 percent target while maintaining a strong labor market environment. At the moment, participants felt it was important to quickly shift the stance of monetary policy to neutral. They also noted that a restrictive policy stance is likely to become appropriate depending on the changing economic outlook and risks.
This could signal the Fed's intention to raise rates more aggressively.
2. It is appropriate to consider selling MBS
All the officials in the meeting supported the plan to reduce the size of the Fed's balance sheet. Some participants said it would be appropriate to consider selling mortgage-backed securities (MBS) once the debt reduction is well underway, so that the SOMA portfolio would be dominated by U.S. Treasuries over the long term. Any plans to sell agency MBS will be announced in advance.
The current plan to shrink the balance sheet shows that the Fed did not choose to actively sell to shrink the balance sheet, but did so by adjusting the reinvestment scale of the mature principal of the securities held by SOMA.
3. Support raising interest rates by 50 basis points each at the next several meetings, pre-buying the foreshadowing of policy adjustments
All officials agreed at the May meeting that a 50-basis-point hike was appropriate, and most officials supported 50-basis-point hikes at the next several meetings.
Many participants predicted that an accelerated withdrawal of supportive monetary policy would put the committee in a good position later this year to better assess the impact of policy tightening and the extent to which economic developments could support policy adjustments.
The remarks are considered to be the Fed's hint at the flexibility of monetary policy at the end of the year.
4. Or suggest that three more 50 basis points of interest rate hikes will end the "water collection", and the focus turns to September
Some of the attendees added that some of their contacts said higher prices were hurting sales. Participants emphasized that they are highly concerned about inflation risks and agreed that these risks are skewed to the upside. The most recent monthly data may suggest that overall price pressures may no longer worsen, multiple officials at the meeting observed. But price pressures remain high and it is too early to believe that inflation has peaked.
The minutes of the meeting showed that Fed researchers raised their inflation forecasts. They estimated the personal consumption expenditures price index (PCE) to rise by 4.3% in 2022, but lowered their forecasts for 2023 and 2024 to 2.5% and 2.1%, respectively. Many attendees expected wage pressures to remain elevated for some time. This suggests that inflation forecasts submitted by Fed officials for their quarterly economic outlook, which will be updated next month, will be revised up.
Comments believe that the above expected adjustment is of great significance. Bloomberg strategist Vincent Cignarella believes that while most Fed officials agree to continue raising interest rates by 50 basis points in the next few meetings, because continued aggressive action will give the Fed the flexibility to turn at any time according to actual needs, the tightening may not be sustainable at all. long time.
Cignarell estimates that if the above PCE forecast is accurate, it would imply that three more 50-basis-point rate hikes by the Fed would end the current tightening cycle and pave the way for a big comeback in risk assets in the second half of this year.
Financial blog Zero Hedge said that at the September Fed meeting, we may see a turning point, and 3 CPIs between now and September may prove that inflation has slowed substantially. That may explain why Bostic also hinted earlier this week that the Fed might pause rate hikes in September.
It is worth noting that this year's mid-term elections in the United States will be held on November 8, and there will be four FOMC resolutions between now and before the election. Considering that the interest rate hike expectations in June and July have basically been set, the resolution in early November Too close to the election, the September meeting is politically and economically important.
5. The U.S. Treasury market faces liquidity risks, and commodity-related risks increase
Several participants who commented on financial stability-related issues noted that monetary policy tightening could affect financial stability, possibly interacting with vulnerabilities related to Treasury market liquidity and private sector intermediary capacity.
Some participants pointed to increased commodity-related financial market risks in the wake of the Russia-Ukraine conflict, which has led to higher and more volatile prices for various energy, agricultural and metal products. Participants noted that regulators do not fully understand the trading and risk management actions of some major players in commodity markets, noting that central counterparties (CCPs) need to maintain risk management in the face of higher volatility and higher margin requirements ability.
Before the release of the minutes of the Fed meeting, U.S. stocks weakened and turned lower, but after the minutes provided room for monetary policy flexibility in the second half of the year, U.S. stocks expanded their gains in late trading and refreshed their daily highs, and the Dow rose again. As of the close, the Dow rose for four consecutive days; the Nasdaq and the Nasdaq 100 both rebounded from the new low since November 2020 set yesterday; the S&P 500 closed up 37.25 points, or 0.95%.
