NEW YORK (Reuters) – All officials at the Federal Reserve’s December meeting agreed to slow the pace of its aggressive interest rate increases, allowing them to continue raising the cost of credit to control inflation but in a gradual way.
The minutes of the meeting, which were released on Wednesday, showed policymakers still focused on controlling the pace of price increases and worried about any “misperception” in financial markets that their commitment to fighting inflation was in any way flagging. But officials also acknowledged they had made “significant progress” over the past year. As a result, the central bank now needed to balance its fight against rising prices with the risks of slowing the economy too much.
Policymakers approved a half-percentage-point point rate increase at last month’s meeting, a step back from the three-quarters-of-a-percentage-point hikes used through much of 2022. STORY:
STOCKS: S&P 500 pared a gain and was last up 0.38% BONDS: The U.S. Treasury 10-year yield ticked up and was last at 3.707%, still lower than late Tuesday. The yield on the 2-year note rose to 4.382%, a tad up on the day. FOREX: The dollar index turned 0.24% lower
RICH STEINBERG, CHIEF MARKET STRATEGIST, THE COLONY GROUP, BOCA RATON, FLORIDA
“We’re going to be in this tug of war in the short run until the market understands the length and breadth of Fed policy and recessionary red flags.”
“Until we see where the terminal rate is, it’s hard in my imagination to see any kind of PE (price earnings) expansion.”
BOB MILLER, HEAD OF AMERICAS FUNDAMENTAL FIXED INCOME, BLACKROCK (email)
“Today’s release of the December FOMC meeting minutes reflect a discussion that we’ve already been briefed on. Indeed, Chair Powell’s post-meeting press conference, and Fed speak since then, have stuck to the overall message: ‘The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.’
“And while participants did vote to step down the pace of policy rate increases from 75 basis point (bps) increments to 50 bps at the December meeting, no speakers have prejudged the next February meeting and the minutes don’t shed much light on the topic either. Furthermore, Chair Powell has been reiterating that the pace of rate hikes is not the main question anymore, but rather it’s the ultimate level of rates (terminal) and how long to maintain them there.
“As such, it isn’t surprising that the minutes showed that participants continued to discuss the cumulative tightening of monetary policy and the lags between policy movement and impacts on the real economy. While participants agreed that ongoing rate hikes were appropriate, they also discussed the need to balance two-sided risks from policy: the risk of not doing enough and allowing prolonged above-target inflation to unanchor inflation expectations, or conversely the risk of doing too much and causing an unnecessary reduction in economic activity.
“Still, the adjustments to the participants’ economic outlooks were of interest, particularly since the revisions to the Summary of Economic Projections (SEP) between September and December were quite notable for inflation. In fact, Committee members still find inflation risks tilted to the upside, despite the clear improvement in inflation dynamics over the prior two months. They seem now to be more focused on the labor market as the source of inflation, a conclusion we think rests upon shaky assumptions. Recession was not any participant’s modal outlook. We’ll be watching closely the descriptions of their assessments of risks to the outlook in forthcoming speeches as we think the critical forces motivating the original hawkish stance have already begun to shift.”
BRIAN DAINGERFIELD, HEAD OF G10 FX STRATEGY, NATWEST MARKETS, STAMFORD, CONNECTICUT
“The reaction of the dollar was modest today after the release of the minutes. I think the core tone of the minutes was something that was very well reflected at the December meeting at the time. You think about when the Fed held its meeting in December – we got a new ‘dot plot,’ which showed a drift up in the median dot expectations for 2023, for example, there was a slowing of the pace but there was a clear focus on data dependent, moving meeting by meeting. And that sort of hawkish undertone that comes with that change in the ‘dot plot’ I think was well reflected in the press conference and the forecasts and the statement at the time and the minutes I don’t think offered significant new information outside of that message.”
“If anything the message from December was reinforced by the minutes. There wasn’t really a major discussion of what the Fed might consider doing at its next meeting. There wasn’t any obvious hint I would say that the Fed was leaning towards slowing further or leaning towards retaining this new base of 50 basis points moves that they did in December. I think that’s the core reason why we haven’t seen a big reaction, because the message from the minutes is very consistent with all the information we got in December and there really wasn’t much to give a big hint about what the committee’s next move might be at its meeting in early February.”
MIKE LOEWENGART, HEAD OF MODEL PORTFOLIO CONSTRUCTION, MORGAN STANLEY GLOBAL INVESTMENT OFFICE, NEW YORK
“The Fed minutes are a good reminder for investors to expect rates to remain high throughout all of 2023. Amid a persistently strong job market it makes sense that fighting inflation remains the name of the game for the Fed. We will get our first glimpse of just how strong hiring is this week and whether the labor market can continue to withstand higher rates. Bottom line is that even though we flipped the calendar, the market headwinds from last year remain.”
CHUCK CARLSON, CHIEF EXECUTIVE OFFICER, HORIZON INVESTMENT SERVICES, HAMMOND, INDIANA
“(The Fed) still wants to be seen as hawkish on inflation and that’s going to be a continuing theme this year. Folks expecting a pivot in the near term are likely to be disappointed.”
“The reason that the chances of a pivot first half of the year are pretty slim, is the Fed is really focused on fighting wage inflation. And the only mechanism they have is raising rates. That’s what they’re trying to fight.”
“The problem that the mechanism is not perfect, because it might take a while. I’m expecting to see the Fed stay hawkish until they see wage inflation go well below 5%.”
“They’d like to see wage inflation in the 3% to 4% range on a consistent basis, and until then they’re going to be hawkish and continue to push rates higher.”
CHRISTOPHER LANOUETTE, MANAGING DIRECTOR AND FIXED INCOME MANAGER OF TAXABLE AND TAX-EXEMPT BOND PORTFOLIOS, CIBC PRIVATE WEALTH US, BOSTON
“Probably not a lot of new information as far as what we learned at the last meeting. It seems like the challenge for Powell is to continue to put his foot on the monetary brake so to speak and continue to be hawkish and the minutes show that in the committee’s concern that the signals the market is taking from the Fed, the market thinks the Fed is going to blink and the Fed is going out of their way to say we are bringing inflation down to 2% and there is going to be some pain. It seems like the market still hasn’t come to terms with that.”
“We’ve seen that going back to probably June where the market seems to get ahead of itself with some data that may be a little better than expected on the inflation front and the Fed has to come on and kind of talk the market back and be hawkish and when you get the data that is a little softer, Powell has to balance his comments. He is essentially walking a tightrope in that he obviously doesn’t want to kill the economy but by the same token they are well aware of the mistakes that were made by relenting too early fighting inflation, so he is going to continue to press forward, he doesn’t have a choice really. We are at 4.7% on core PCE and their projection is 3.5% by the end of this year, that is a pretty big move.”
JAKE DOLLARHIDE, CHIEF EXECUTIVE OFFICER, LONGBOW ASSET MANAGEMENT, TULSA, OKLAHOMA
“It’s a broken record every time the Fed hints at higher rates or confirms higher rates the market sells off. It’s like Pavlov’s dog. Higher rates equals ringing bells.”
“This market wants to go higher but it just needs some news at some point. Investors are reacting to the past and ignoring the present. The comments from Kashkari today were good news. He was dovish and he’s typically hawkish.”