Liquidity remains thin in financial markets, as many market players are still on vacation. However, while a short trading week due to numerous bank holidays, it is marked by some important events.
One was the FOMC Minutes released yesterday in late North American trading. The minutes are released three weeks after the actual FOMC Meeting, so these ones refer to the meeting last December.
The Fed delivered a 50bp rate hike increase at that meeting, slowing down the pace of tightening from the previous 75bp. In other words, the slowdown signaled a dovish stance.
But the minutes released yesterday are quite hawkish. Here are three takeaways:
The federal funds rate target will not be reduced in 2023
The restrictive policy stance is here to stay
FOMC members want to avoid the perception of sounding too dovish
Federal funds rate target will not be reduced in 2023
One of the main points of yesterday’s minutes is that the federal funds rate target will not be reduced in 2023. In other words, the Fed will keep tightening until it will reach the cycle’s terminal rate, and then stop.
But no FOMC participant sees the Fed starting to cut in 2023 – a hawkish stance by any means.
Fed will keep the restrictive policy stance
The Fed is determined to bring inflation down to 2%. Considering where it is now, there is a lot of room for inflation to decline.
To do so, the restrictive policy stance must remain in place even if inflation cools faster than the Fed anticipates.
Any perception of FOMC members sounding too dovish should be avoided
The major risk that the Fed members see is not to sound too dovish. Therefore, a misperception from the public that inflation is controlled would complicate Fed’s life.
To sum up, the minutes show a Fed in a full display of hawkishness. It will be interesting for market participants if this hawkishness translates into renewed dollar strength in 2023.
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