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Fed Minutes Are Here, and They Look Pretty Hawkish

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Federal Reserve Chairman Jerome Powell in June 2022.

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Minutes from the Federal Reserve’s June 14-15 meeting reveal central bankers’ growing anxiety over inflation and plans to adopt a restrictive policy stance in order to cool rapidly rising prices.

The minutes read hawkish. Major stock indexes, however, were largely unchanged just after the release as investors consider economic developments since the Fed last met and bet that flagging economic growth will ultimately limit the amount of tightening the central bank must conduct.

This is breaking news. Please check back for more analysis and read a preview of the minutes below.

When the Federal Reserve releases minutes from its June 14-15 meeting at 2 p.m. today, investors will get a deeper look at the central bank’s latest deliberations and economic analysis. 

Rationale behind the Fed’s 0.75-percentage-point rate hike in June, which was the biggest since 1994, has been well telegraphed. Heading into the policy-setting meeting, the consumer price index made a fresh 40-year high and a separate report showed an alarming increase in consumers’ longer-term inflation expectations. The latter data point has since been revised lower, but inflation expectations remain well above the Fed’s 2% target. Central bankers have revealed increased concern over elevated inflation expectations because inflation psychology can become a self-fulfilling prophecy as expectations of higher future prices prompt consumers to pull forward spending.

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In his press conference and subsequent congressional testimony last month, Fed Chairman Jerome Powell stressed that fighting inflation is the central bank’s top priority, even at the expense of economic growth. Inflation is already hurting growth, and Powell has said he wants to cool demand—which exploded on account of simultaneous fiscal and monetary pandemic stimulus—to regain price stability.  

Since the June meeting and Powell’s most recent public appearances, commodity prices have cooled, mortgage rates have risen, and markets have fallen as recession fears intensify. Given the dramatic pivot in market focus to near-term recession concerns, many of the discussions in the minutes to the June meeting may thus appear stale, economists at


Deutsche Bank

say. Still, there may be clues about how the Fed is thinking about the tradeoff between some economic pain and the need to bring inflation down over time, they say.

Here are a few places to look for clues—and how to interpret them.

Super-sized hikes–one and done or more to come?

The 0.75-percentage-point hike was only a remote possibility leading up to the June decision. Powell has said a subsequent increase of that magnitude wasn’t his base case, but Wall Street believes it is. Much will depend on the data before the July 26-27 meeting, with the June CPI coming out July 13. The Deutsche Bank economists say they are looking for hits around the thresholds needed to “downshift” the pace of hikes, noting that many Fed officials are signaling expectations for another “super-sized” 0.75-percentage-point increase this month.

At this point, traders are pricing in about an 83% chance of another three-quarter point hike in July, with a 78% probability of a 0.5% increase in September. 

Inflation talk

Given that the three-quarter point hike was a surprise until just before the meeting, the June minutes should reflect the increased inflation concern that led to the more aggressive policy move, economists at Citi say. Coupled with language echoing Powell’s pledge to bring down inflation despite the negative consequences for growth, the minutes may read “hawkish” to a market that has become much more focused on downside growth risks since the June meeting, they say. 

While signs of peaking inflation have emerged, such as falling copper prices and inventory warnings from retailers including


Target

(ticker: TGT) and


Walmart

(WMT), the former has mostly happened after the June Fed meeting and wouldn’t show up in the minutes. Neither the former or the latter is yet showing up in the economic data, and it remains to be seen whether wither would enough to cool overall inflation. Powell has said he needs to see “clear and convincing evidence” that inflation is coming down—the minutes could shed light on what might represent such evidence. 

Growth concerns

With the latest rate decision came updated quarterly economic forecasts through 2024, as well as new longer-run estimates. In the June summary of economic projections, or SEP, Fed officials raised their expectations for the fed funds rate, downgraded their gross domestic product estimates, and raised their unemployment rate forecasts. That is as they lifted their near-term estimate for the core PCE, or the personal consumption expenditure index minus food and energy, while lowering their forecasts for the metric in 2023 and 2024 and reiterating their belief that inflation by that measure would then return to target.

Some economists say the latest SEP is still far too optimistic and doesn’t add up. How, for example, can inflation fall within striking distance of 2% next year with GDP still rising 1.7%? Since the release, Powell and other Fed officials have more directly articulated the difficulty in engineering a so-called soft landing, where the central bank sufficiently cools inflation without reversing growth. 

The next Powell pivot

As Jim Reid of Deutsche Bank points out, we are only 31/2 months into this Fed hiking cycle and futures are already pricing in around 0.7 percentage point of interest-rate cuts in the year after the February 2023 meeting. That translates to a peak policy rate of about 3.39%.  

As growth concerns pick up, with more economists now saying a recession is inevitable and some of them pulling forward their recession start-date call to this year from 2023, stocks are continuing to fall and investors are wondering what it will take for the Fed to shift its focus back to growth from inflation.  

“When markets are in turmoil, investors always look at the Fed as the entity that can save the day,” says Roberto Perli, head of global policy at


Piper Sandler
.
This time is no exception, he says, adding that client questioning is intensifying around whether markets have dropped enough, and recession fears are high enough, to induce a Fed pause or pivot

This time is no exception: We regularly field many questions to the effect of, have the markets dropped enough to induce the Fed to pause or reverse course? Recently, with markets remaining volatile and talks of recession becoming widespread, this line of questioning intensified.

For now, Perli says the Fed isn’t close to pausing or changing course. The June minutes will probably reflect that sentiment. What happens beyond that is far less certain.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com

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