06.07.2023 – Finally news: In a quiet week, the Fed Minutes have provided a little movement. And namely to the south. But the matter was not really surprising: Presumably there will be further interest rate hikes.
So after the national holiday on the 4th of July yesterday, the minutes of the June meeting. The market was somewhat irritated after the Fed Minutes. Here is the four-hour chart of the Dow Jones.
Source: Bernstein Bank GmbH
And these are the details. Almost all members on the Federal Open Market Committee were in favor of more rate hikes. But at a slower pace than before.
Fear of recession
The reason for the June pause after rate hikes: The FOMC worried about economic growth. Specifically, it said, “The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effects remained uncertain.” So the Fed is well aware that it could choke off economic growth.
The factory orders that just came in confirmed this concern. Core orders in May slipped for the fourth straight month, marking the weakest reading since September 2020 at minus 4.24 percent year-over-year.
In addition, some monetary watchdogs wanted more time to assess the steps taken so far. Literally, the minutes said, “leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability.” After all, the 5 percentage point increase was the most aggressive tightening since the early 1980s.
There’s probably more to come
So what’s next for the Fed? Presumably, there will be more rate hikes. At the June 13-14 meeting, 16 of 18 members thought at least one more rate step would be needed. Twelve even wanted two or more.
The upshot of all this is that the hawks on the FOMC actually wanted to raise again in June, but they agreed to a pause. On the condition that there will be more rate hikes at the end of the year. So if incoming data do not bring any surprises, another hike in July is a foregone conclusion. All in all: higher for longer. And this despite the fact that the Fed is well aware of the risks of an economic downturn. For corporations, this means: Higher borrowing costs with declining consumption. A rather unpleasant situation. We are curious to see what happens next – whether long or short: Bernstein Bank wishes successful trades and investments!
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