Kit Juckes, Research Analyst at Societe Generale, explains that the short version of the FOMC minutes seem to be that there is uncertainty about how to react to the combination of low inflation and falling unemployment, uncertainty about whether to react to asset prices, and debate about when to start shrinking the Fed’s balance sheet.
“On the last of these, the consensus still looks for a start in September. As for rates, the market prices a strong likelihood of one more hike this year, but only a 10% chance of two hikes. The markets are broadly priced for a peak in fed Funds in a 2-2.5% range, and for them to seriously think about, and start pricing, something higher than that the pace of hiking needs to pick up. At the moment, the tone of the FOMC and the trend in the data point to a pedestrian pace of tightening, supporting range-trading in treasuries and sending FX markets elsewhere in search of catalysts for movement.”
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