FOMC Minutes Show Fed Rate Hike Decision Was "A Close Call", Feared Market Reaction

Since The December 16th FOMC decision to hike rates, Gold is up over 2%, Bonds up 1%, and stocks down 3% suggesting the word "error" with regard Fed policy. As The FOMC Minutes are released, traders anticipate confident-hawkishness and a focus on ignoring current data in favor of preferring their own confident outlook:

  • *ALMOST ALL FED OFFICIALS AGREED LIFTOFF CONDITIONS MET IN DEC.
  • *FED: LINGERING RISKS TO OUTLOOK INCLUDED FURTHER USD STRENGTH
  • *A FEW FED OFFICIALS SAID FINANCIAL RISKS COULD ALTER RATE PATH

January's meeting has negligible probabilities for a rate move but March has 45% chance of a hike and 3% chance of a cut. The apparent unanimity of December's decision appears questionable given the Minutes suggestions of some dissent.

Pre-FOMC Minutes: S&P Futs 1983.25, 10Y 2.19%, Gold $1094, EUR 1.0755, WTI $34.05

Policy "error" or not?

 

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Further headlines:

  • *SOME FOMC MEMBERS SAW DECEMBER RATE RISE AS `CLOSE CALL'
  • *RISKS TO INFLATION INCLUDED OIL, STRONGER DOLLAR: FED
  • *COUPLE MEMBERS WORRY GLOBAL DISINFLATION MAY OFFSET JOB GAINS
  • *SOME FOMC MEMBERS STRESSED NEED TO SEE INFLATION RISING
  • *SOME FOMC MEMBERS SAW `CONSIDERABLE' RISK TO INFLATION OUTLOOK

The key section showing that the rate hike was a "close call":

If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity. Members observed that after this initial increase in the federal funds rate, the stance of monetary policy would remain accommodative. However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.

On the future path:

Even after the initial increase in the target range, the stance of policy would remain accommodative. Participants saw several reasons why a gradual removal of policy accommodation would likely be appropriate.

When does the Fed stop hiking? When "financial stability" risk emerges:

Several participants discussed potential interactions between policy normalization and risks to financial stability... few participants also indicated that significant risks to financial stability, should they emerge, could alter their view of the appropriate policy path.

The Fed on market expectatitons:

Quotes in financial markets and survey results suggested that investors were quite confident that the Committee would raise the federal funds target range 25 basis points at the current meeting.

On correcting asset prices, aka energy junk bonds:

In their discussion, several participants commented that markets for leveraged finance had been correcting since midyear—particularly for the most risky assets, including those associated with energy firms—and noted that the widening of credit spreads in corporate bond markets appeared to be largely due to the repricing of riskier assets

The Fed on liquidating and gating mutual funds:

Concerns among investors about the high-yield bond market increased notably in the days before the meeting after an openended mutual fund specializing in junk bonds suspended redemptions and closed.

FOMC Minutes.