FOMC minutes instant insight: A touch of hawkishness leaves a 50bps rate hike on the table

Key takeaways

• In their January meeting, Fed officials agreed to continue rate hikes until high inflation is controlled.
• The Fed is still attuned to the risk they may have to do more to keep inflation falling, a hawkish tilt that may come into more precise view when policymakers issue new interest rate and economic projections at a meeting in four weeks.
• Economic data since the last meeting show the economy growing strongly and adding jobs at an unexpectedly rapid pace, but inflation remains well above the Committee's longer-run goal of 2% and the labor market remains very tight.

The Federal Reserve released the minutes from its latest policy meeting on Wednesday, which revealed that a solid majority of Federal Reserve officials agreed to raise the target range of the federal funds rate 25 basis points.

Many of those said that would let the Fed better "determine the extent" of future increases. However, "participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook," and that interest rates would need to move higher and stay elevated "until inflation is clearly on a path to 2%."

Data since the last meeting have shown an economy continuing to grow and adding jobs at an unexpectedly rapid pace. It is making less steady progress back towards the Fed's 2% inflation target. While there were signs that the cumulative effect of the Committee's tightening of the stance of monetary policy had begun to moderate inflationary pressures, inflation remained well above the Committee's longer-run goal of 2% and the labor market remained very tight.

The policy statement issued on Feb. 1 said "ongoing increases" would still be needed, but shifted the focus from the pace of coming rate hikes to their "extent," a nod to the fact that policymakers feel they may be approaching a rate that is adequate to make continued progress in reducing inflation.

The Fed officials are still attuned to the risk they may have to do more in order to keep inflation falling, a hawkish tilt that may come into more precise view when policymakers issue new interest rate and economic projections at a meeting in four weeks.

Notably, “ a few” officials favored or could have supported a 50bps rate hike, leaving the door open for such a move in the future if the economy continues to grow rapidly. The market-implied odds of a such a move remain near 20% according to the CME’s FedWatch tool.

The minutes showed the Fed navigating towards a possible endpoint to its current rate increases, at once slowing the pace in order to more cautiously approach a possible stopping point while also leaving open just how high rates will ultimately rise in the event inflation does not slow.

FOMC minutes: Market reaction

Markets saw a muted initial reaction to the minutes but as we go to press, we are seeing risk appetites fade slightly. Major indices are approaching their daily lows after yesterday’s big drops, while Treasury yields are ticking up a couple of bps across the curve and the US dollar index hits fresh weekly highs.

Moving forward, there is nothing in these FOMC minutes that should keep the central bank from raising interest rates “higher for longer” if US economic data continues to come in stronger than expected.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter @MWellerFX