How Did the FOMC Minutes Change the Market’s Perception of Fed Policy?

May 25, 2023

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1:30 pm

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*Data from CME Fedwatch, calculations by Mish.*

I had one data error in my previous chart. I had a weighted average of 5.38 percent for July on May 31. The correct number is 5.17 percent.

Following the Minutes of the Federal Open Market Committee May 2–3, 2023, the market got some of the Fed’s message of higher for longer.

Here is the key sentence from the minutes: “Respondents expected the peak rate to be maintained through the January 2024 FOMC meeting.”

The reaction is very noticeable from December on into next year.

The overall net change from the May 3 post-FOMC Q&A meeting with the press to the release of the May 3 minutes is even more dramatic.

For example, looking ahead to March of 2024, the weighted average expectation rose from 3.78 percent to 4.47 percent. That’s nearly three, quarter-point cuts that have been priced out.

The terminal rate changed by less than a quarter-point. It now fluctuates very little through November.

But the market still sees rate cuts starting in December and roughly a quarter-point cut each at three consecutive meetings.

For discussion of six key takeaways from the minutes, please see Fed Minutes Include Expectation of No Rate Cuts Through January 2024

This post originated on MishTalk.Com.

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8dots

10 months ago

The Fed puke AI.

MPO45v2

10 months ago

Inflation in the UK still out of control as well as most key US trading partners. There is a 100 basis point hike expected for BoE now. And China isn’t back to normal now pushing demand up for oil and other services.

link to reuters.com

Scooot

10 months ago

Reply to MPO45v2

Yes, and they still keep trying to sell the idea that because it’s fallen we should all jump for joy, when in reality it means it’s still rising by far too much, just not as much. I’d be amazed if they hike by 100bp though.

Salmo Trutta

10 months ago

Every recession since WWII was both predictable and preventable. But today, since Powell eliminated reserve requirements, it’s a little harder.

The 6-month rate-of-change in money flows, the volume and velocity of our means-of-payment money supply, became negative in January.

The 10-month roc (proxy for the real output of goods and services), turns negative in May (numbers not yet released). If the present tightening continues, we will enter a mild recession in the 2nd qtr.

As Jacob Viner (a leading figure of the Chicago faculty), said: “You don’t belong in this class”.

worleyeoe

10 months ago

Wolf Richter pointed out recently that June’s 9.1%, inflation reading is the floor for YoY. Assuming overall inflationary inputs remain elevated and don’t fall, he seems to be suggesting that next month could turn out to be the last time YoY inflation contracts. Starting in July, the lower CPI would translate into rising YoY inflation, again, assuming, overall inflation doesn’t retreat in a meaningful way.

If it works out this way, July & August could turn out to be very interesting months indeed. The Fed keeps saying higher for longer, but what if it turns out to be “even higher for longer”?

MPO45v2

10 months ago

Reply to worleyeoe

The easy fix is a default. If no social security checks go out then there won’t be any spending and core inflation will come down. Let’s see what tomorrow’s core CPI is all about. I expect little to no movement down.

Salmo Trutta

10 months ago

Reply to worleyeoe

Right. The y-o-y “base” months might not show much acceleration, but inflation as measured by a 2-year roc, has barely receded.

CPI

06/1/2022 ,,,,, 296.311

07/1/2022 ,,,,, 296.276

08/1/2022 ,,,,, 296.171

09/1/2022 ,,,,, 296.808

10/1/2022 ,,,,, 298.012

11/1/2022 ,,,,, 297.711

12/1/2022 ,,,,, 296.797

01/1/2023 ,,,,, 299.170

How Did the FOMC Minutes Change the Market’s Perception of Fed Policy?

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