The problem with the Fed fighting inflation is that it needs to tackle growth sharply in order to do it. Investors have been wanting to know how much pain is the Fed willing to inflict on the US economy to bring down inflation. In the last Fed meeting, the Fed recognised that growth was slowing in the US. See here for that summary of the last Fed meeting. So, these minutes were always going to be viewed very intently to see any more hints on the Fed’s actions.
The minutes show a Fed ready to slow the pace of hikes
All of the participants saw a 75bps hike as appropriate, but no one wanted a 100 bps hike. The key line that allowed stocks to pause their falls on Wednesday night (before resuming them on Thurs am) was that, ‘at some point in time it would be appropriate to slow the pace of increase’.
The path of the Fed
Markets took a breather from the recent sell-off on these minutes in relief that the Fed would be willing to pause. However, the Fed also recognised that there was little evidence inflation pressures were subsiding. Do though note the weak CPI print that took place since these minutes. So, the key point is that the Fed will still continue to hike rates if inflation dictates that they need to. Remember the influence of Volcker who took interest rates up to 20%! This drove unemployment up to 10% and some civil unrest. However, Volcker then prompted a new era of growth and low inflation. The key thing to learn from the 1980s is that if you go soft on inflation it only gets worse. You have to go hard.
The main takeaway is that inflation will remain a very important metric going forward. If inflation prints surprise to the downside look for short-term USDJPY selling as yields should also fall. Surprise to the upside then look for potential short-term USDJP buying as yields should also rise.
Learn more about HYCM
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure. *Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.