23.02.2023 –Investors around the world are dissecting the Feb. 01 Federal Open Market Committee minutes. Here’s our 50 cents from the discussions of the masters of money: the Federal Reserve’s Minutes argue for further rate hikes.
First, the market reaction. Wall Street reacted just a little and is still pondering. Here is a look at the hourly chart of the Nasdaq 100, which is particularly sensitive to interest rates.
By and large, the minutes were no surprise. The blog “Newsquawk” judged that the Minutes were “hawkish leaning.” However, rather “hawkish on the margin” – that is, in the margins/in what is between the lines. This was especially so since the comments in the meeting came before the recent strong economic data. Specifically, the strong gain in the jobs market in January, the pickup in the monthly CPI inflation rate in January, or the largest gain in retail sales in nearly two years. This, he said, lent more weight to the hawks’ statements calling for more and stronger rate hikes.
There’s probably more to come
The reference to the “few” members calling for a 50 basis point rate hike was likely a reference to non-voting members Jim Bullard (head of the St. Louis Fed) and Loretta Mester (Cleveland), according to “Newsquawk.” In contrast, the doves argued there were dangers of a recession this year. All the decision makers agreed that there would have to be more rate hikes, according to the Minutes. Some participants stressed that monetary policy that is not restrictive enough could halt progress in containing inflation. Inflation probably would not reach the 2 percent target until 2025, they said.
Real estate and the stock market
Further, some Fed officials reported that financial conditions have loosened in recent months, so this calls for a tighter stance in monetary policy. This is very helpful for traders: Of course, the Fed is keeping a close eye on the financial market. A quote on this from the Minutes: “The staff judged that asset valuation pressures remained notable. In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual. In addition, the forward price-to-earnings ratio for S&P 500 firms remained above its median value despite the decline in equity prices over the past year.”
No word on the interest rate pause
For the financial blog ZeroHedge, this was the most interesting statement: Fed Chairman Jerome Powell seemed to have moved in the direction of the hawks by referring to the loosened financial circumstances. For us, this is the most interesting observation: David Wilcox of Bloomberg Economics pointed out on Bloomberg TV that there had only been one time the notion of a pause in rate hikes – and that statement referred to a different central bank.
And in a strange coincidence of timing, Jim Bullard just said on CNBC that the U.S. economy is stronger than previously thought. He went on to repeat his call for a terminal rate of 5.25 to 5.5 percent. We recall that as of Feb. 2, the Federal Reserve had raised the federal funds rate by 0.25 percentage point to the range for the federal funds rate of 4.5 to 4.75 percent. We hope you see more clearly now – Bernstein Bank wishes you successful trades and investments!
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