FOMC Minutes Show "Some" Fed Officials Push For More Hikes, Sees "Mild Recession In 2023"
Tl;dr: Bloomberg's Ira Jersey says the BI Fed Minutes Sentiment Indicator showed slightly more hawkish and dovish sentences, causing a slight dovish move in the exponential moving average compared with the March meeting.
“The most prominent theme within the minutes of the May FOMC meeting was the collective caution, and uncertainty, around the credit tightening implications from the regional banking crisis,” says BMO’s US rates strategist Ben Jeffrey.
Specifically, participants noted, “tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain. Against this background, participants concurred that they remained highly attentive to inflation risks.”
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Since the last FOMC statement and press conference, on May 3rd, stocks (well megacap tech) have outperformed while Bitcoin and bonds have been clubbed like a baby seal. The dollar is stronger, gold is down...
Source: Bloomberg
But the equity market is very mixed with The Nasdaq 100 is up over 4% in those three weeks while The Dow is down around 2%...
Source: Bloomberg
Expectations for Fed Funds have risen (yes, hawkishly risen) since the FOMC, despite all the talk about Fed pause/cuts...
Source: Bloomberg
Basically unwound the dovish sentiment immediately seen after the FOMC, with July swinging from pricing in a 25bps cut to 75% chance of 25bps hike...
Source: Bloomberg
Economic data has serially disappointed since the last FOMC meeting...
Source: Bloomberg
Of course, one huge difference between the last FOMC meeting and now is that the debt-ceiling drama has escalated with June 1st T-Bill yields now above 7%...
Source: Bloomberg
But none of that will be in these Minutes - though it is worth noting any reference to Fed help in the case of some govt crisis (but we do not expect that).
The main issue of note is just how much concern over credit conditions was there to convince most Fed officials to signal an impending rate pause.
So what did they say.
Key paragraph:
...participants discussed their views on the extent to which further policy firming after the current meeting may be appropriate. Participants generally expressed uncertainty about how much more policy tightening may be appropriate.
Many participants focused on the need to retain optionality after this meeting.
Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.
Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary. In light of the prominent risks to the Committee's objectives with respect to both maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook.
"Several" is more than "some" and so this is potentially more dovish, but uncertainty i shigh:
Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, although a few noted the risks were two sided.
On the debt ceiling:
Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy. A few participants noted the importance of orderly functioning of the market for U.S. Treasury securities or stressed the importance of the appropriate authorities continuing to address issues related to the resilience of the market. A number of participants emphasized that the Federal Reserve should maintain readiness to use its liquidity tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to mitigate future financial stability risks.
On the impact of policy:
Fed staff reiterate forecast for a “mild recession starting later this year, followed by a moderately paced recovery”
On the banking crisis:
In terms of financial-sector leverage, going into the period of recent bank stress, banks of all sizes appeared strong, with substantial loss-absorbing capacity as measured by regulatory capital ratios well above levels that prevailed before the Great Recession. However, the ratio of tangible common equity to total tangible assets at banks—excluding global systemically important banks—had fallen sharply in recent quarters, partly because of a substantial drop in the value of securities held in their portfolios.
The majority of the banking system had been able to effectively manage this interest rate risk exposure. However, the failure of three banks resulting from poor interest rate risk and liquidity risk management had put stress on some additional banks. For the nonbank sector, leverage at large hedge funds remained somewhat elevated in the third quarter of 2022, and more recent data from the Senior Credit Officer Opinion Survey on Dealer Financing Terms suggested this fact had not changed.
On tightening credit conditions:
“Several participants remarked that tighter credit conditions may not put much downward pressure on inflation, in part because lower credit availability could restrain aggregate supply as well as aggregate demand.”
While there was only mention of the word "pause" in the Minutes, this all fits very much with Powell's clear enunciation at the end of last week that he's leaning towards a pause. No one is suggesting rate-cuts at all.
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Read the full Minutes below:
