As February draws to a close, market participants turn their attention to the FOMC minutes, released three weeks after every meeting, to gain insight into how the FED plans to evolve its monetary policy stance to bring inflation down to its much-desired 2% target rate.
Despite the annual U.S. Consumer Price Index (US CPI) reaching a forty-year high of 9.1% in June 2022, market participants would have been relieved to see inflation tick down during the second half of 2022. However, with a much higher-than-expected 517 000 jobs being added to the U.S. economy in January 2023, it is clear that the labour market is “very tight, contributing to upward pressure on wages and prices,” and further rate hikes may be in store for market participants. The annual U.S. CPI figure for January 2023 was slightly above expectations at 6.4%, only marginally down from the prior month, emphasizing that inflation has “remained well above the FED’s 2% target.”
The FOMC minutes implied that although recent data has seen a “welcome reduction in inflation,” “substantially more evidence” is necessary before the FED assumes that inflation is “on a sustained downward path,” thus indicating that “ongoing rate hikes” may be warranted. The U.S. Dollar strengthened against a basket of currencies following the release of the FOMC minutes. Bond yields increased marginally, with the two-year treasury yield rising “about four basis points.” Moreover, the S&P 500 Index (SPX) closed 0.16% lower on Wednesday following the release of the minutes as market participants price in expected future rate hikes.
James Bullard, president of the Federal Reserve Bank, emphasized that “going higher sooner would be more effective,” referring to future rate announcements, but believes the policy rate should peak at “around 5.375%”.
Sources: Bloomberg, CNBC, Reuters, Trading View
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