The market breathes a sigh of relief? The Fed's minutes showed no hawkish surprise, and the bal

In the eyes of many industry insiders, the January interest rate decision announced by the Federal Reserve three weeks ago was the most hawkish meeting of the Fed in recent years. At the turning point in the era of austerity, the Federal Reserve not only completely revamped its policy statement at the time, but even deletd a single word of the pledge to support the economy that had been announced at the beginning of the statement for many years. Fed Chairman Powell threatened at a press conference after the meeting that he would not rule out the possibility of raising interest rates at every policy meeting in the future...

It is precisely because of the interest rate meeting of Powell's "changing the mask of the eagle king and stepping on the bulls of stocks and bonds" that many people in the industry also expected earlier this week whether the minutes of the Federal Reserve's January meeting to be released on Wednesday will be revealed. More details on the Fed's aggressive interest rate hikes and even balance sheet reductions.

However, they were undoubtedly disappointed by the final result last night-perhaps the interest rate meeting has already brought out all the killers. In the latest meeting minutes, the Fed failed to reveal more valuable information. The content is also basically the same as the hawkish signal released on the interest-free night.

Fed policymakers agreed that now is the time to tighten monetary policy as the impact of inflation on the economy widens and the job market is strong. But they also said any decision would depend on an analysis of the data at each meeting. In addition, although the minutes released a signal that interest rates may be raised in March, they did not reveal any clues about a possible 50 basis point rate hike at a time, nor did they mention more details such as the timing of the reduction of the balance sheet.

Many strategists therefore said that the minutes of the meeting showed that Fed policymakers may not be as hawkish as many investors feared!

// Highlights from the Fed's January meeting minutes //

interest rate changes
The minutes showed that Fed officials believed at their January monetary policy meeting that they should raise interest rates as soon as possible and remain vigilant of stubbornly high inflation, or accelerate the pace of tightening if necessary.

Participants discussed the impact of the economic outlook on the likely timing and pace of unwinding of policy easing. Most officials at the meeting believed that the target range for the federal funds rate could rise faster than it did after 2015 if economic development generally meets the Committee's expectations. Compared with the situation in 2015, participants saw a much stronger outlook for growth in economic activity, with significantly higher inflation and a marked tightening of the labor market. They also expect that it will soon be appropriate to raise the target range for interest rates.

However, participants also emphasized that the appropriate policy path will depend on changes in economic and financial conditions, their impact on the economic outlook and the risks associated with the outlook. They will updat their assessment of the appropriateness of the monetary policy stance for the environment at each meeting.

Taper process
Given high inflationary pressures and a strong labor market, participants continued to believe that the Committee should complete the Net Asset Purchase Program as soon as possible. Most participants preferred to continue reducing asset purchases in line with the schedule announced in December, ending bond purchases by early March this year.

However, several participants said they preferred ending the asset purchase program earlier to send a stronger signal that the Fed is committed to reducing inflation.

Reduction plan
In its January monetary policy statement, the Fed expected that the shrinking of its balance sheet would be carried out after the rate hike was initiated, and also proposed a plan to massively reduce the size of its balance sheet over time, such as holding mainly U.S. Treasury bonds in the long run. That means the Fed could slash its current holdings of $2.7 trillion in mortgage-backed securities. The latest meeting minutes reiterated the above statement, but did not reveal more details.

Participants argued that a sharp reduction in the size of the Fed's balance sheet might be appropriate given the current high level of Fed securities holdings, the minutes showed. The Fed's balance sheet plan will be determined at an "upcoming meeting." The minutes also noted that "some participants believed that the situation may support the start of reducing the size of the balance sheet later this year."

In addition, many participants believed that at some point in the future, it might be appropriate to sell agency MBS or reinvest some of the principal received by agency MBS in U.S. Treasury securities, which would shift SOMA's portfolio composition to U.S. Treasury securities host.

Inflation and Employment Statements
The minutes showed that the participants agreed that the uncertainty of the inflation path has risen and the inflation risk has shown an upward trend. Most participants noted that if inflation did not fall as they expected, it would be appropriate to unwind easing sooner than they currently expect.

On the employment front, many participants said they believed labor market conditions were at or very close to employment-maximizing levels, citing a number of signs of labor market strength, including low levels of unemployment, elevated wage pressures, near-historic levels of labor Job openings and resignations, as well as widespread worker shortages in many sectors of the economy.

Still, some participants said the economy may not yet be at maximum employment in their view. They point out that even among prime-age workers, the labor force participation rate remains below pre-pandemic levels, in other words a reallocation of labor across sectors could lead to higher employment levels over time.

// Interpretation of investment banking institutions: the minutes are not hawkish enough //

On the whole, although the minutes of the Fed meeting emphasized the importance of maintaining flexibility, there were no more new clues on the expected rate hike or balance sheet reduction plan in March, which made investors generally believe that. The minutes were less hawkish than previously expected.

After the minutes of the meeting were released, the S&P 500 recovered its intraday losses, and the 2-year U.S. Treasury bond yields, which are more sensitive to the Fed’s short-term policy actions, also fell rapidly. The dollar index in the foreign exchange market also ended the day. down.
Ian Lyngen of BMO Capital Markets pointed out that the minutes of the Fed meeting provided little new content - the Fed did not discuss raising interest rates by 50 basis points, and the tone of its balance sheet plan was not surprising, which means that "the minutes of the meeting were relative to expectations. milder." As a result, the market went higher.

Simona Mocuta, chief economist at State Street Global Advisors, said, "Frankly, I think the Fed is a bit anticlimactic. There's been so much rate hike hype in the market lately, and I think everyone is ready for the minutes to be very hawkish. The tone of pie, and the minutes were more like, 'Of course we'll do this, but we'll walk before we run.'"

Matt Maley, chief market strategist at Miller Tabak & Co., also believes that the Fed leaves more leeway for a more aggressive withdrawal of stimulus in the future. But they seem to be telling us that the Fed will not be raising rates aggressively in March.

Paul Ashworth, chief U.S. economist at Capital Economics, commented that Fed officials do not appear to be seriously considering whether to start the monetary tightening cycle with a 50 basis point hike in interest rates, or raise interest rates at the remaining seven meetings this year. once.

In the American media circle, the Wall Street Journal is often regarded as the "mouthpiece" of the Federal Reserve. And after the release of the Fed minutes, the newspaper also pointed out in an opinion article, “The discussion shows that officials are more comfortable raising interest rates in successive policy meetings, which they have not done since 2016. , these meetings are held roughly every six weeks. That means there could be a series of rate hikes in March, May and June.”

The Wall Street Journal also noted, "The minutes from the Jan. 25-26 meeting also show that officials continued to discuss aggressively reducing their $9 trillion portfolio, but offered little on how that might be done later this year. New clues. This move is another way for the Fed to tighten financial conditions to cool the economy.”

// March rate hike balance is back in favor of 25bps //

It is worth mentioning that, judging from the market's bets, after the release of the Fed minutes overnight, as for whether the Fed will raise interest rates by 25 basis points or 50 basis points in March, the industry is beginning to favor the former again.

The odds of a 50 basis point rate hike in March fell from around 70% earlier in the day to just under 50% by the close, data from the interest rate futures market showed.

CME's well-known Fed WATCH indicator also shows that traders currently expect a 55.7% probability of the Fed raising interest rates by 25 basis points in March, and a 44.3% probability of a 50 basis point rate hike.

That's certainly a dramatic turnaround from last Thursday. At that time, because the U.S. CPI data in January exploded to 7 for the second consecutive month, traders expected that the probability of the Fed raising interest rates by 50 basis points in one fell swoop was close to 100%. Speculation of an early announcement of an emergency rate hike.

However, even putting aside the Fed minutes that were not hawkish enough last night, judging from the relevant statements of Fed officials recently, the possibility of the Fed raising interest rates by 25 basis points instead of 50 basis points in March does seem to be relatively more likely. Since the January meeting, Fed officials have continuously expressed their views on the strength of the upcoming rate hike at the March meeting, and at present, except for "Eagle King" Bullard, almost no officials have hinted that they support a direct rate hike of 50 basis points in March.

All 84 respondents to a Reuters poll on February 7-15 expected the Fed to raise the federal funds rate by at least 25 basis points at its March 15-16 meeting. only 20 of them -- or nearly a quarter of respondents -- expect the Fed to raise rates by 50 basis points outright, to 0.50-0.75%.

Of course, it's also worth pointing out that last night's January meeting was held before the latest CPI and PPI data released by the U.S. Bureau of Labor Statistics, both of which were significantly higher than market expectations. The minutes also appear to be slightly out of date. Whether the Fed will raise interest rates by 25 basis points or 50 basis points in March may remain to be seen by more economic data and Fed officials' comments.

“In any case, we take the minutes with a grain of salt because this meeting is ahead of the recent release of CPI and PPI data, which were well above expectations,” said John Doyle, vice president of trading at Monex USA. Pantheon Macroeconomics Chief Economist Ian Shepherdson also said that given the worse-than-expected inflation and wage data after the January meeting, the statements in the minutes were not final.

Richmond Fed President Barkin said in a recent interview that it was "timely" for the Fed to start raising interest rates, but he also pointed out that the specific situation would still depend on the next inflation report. "Will it fall back to more like what we've seen over the past 30 years? Or not?" Barkin noted. "Depending on the answer, you can adjust your stride or timing."