The Daily Update - FOMC Minutes

The 30 April/1May FOMC meeting minutes were released overnight.  Despite them coming from a meeting held days before the latest escalation in US-China trade tensions the market still billed them as one of the key focal points hoping perhaps for a glimmer of insight or support for current market expectations: ahead of the release the Fed Futures was predicting ~70% chance of a rate cut before the end of the year.

As expected, the minutes reaffirmed the Fed’s ‘patient approach’ to adjusting rates is ‘likely to remain appropriate for some time’. It was really the discussion on inflation that was of more interest following Jerome Powell’s post-meeting commentary that he saw ‘transitory factors’ as drivers for the current low level of inflation. The minutes supported this stating: ‘At least part of the recent softness in inflation could be attributed to idiosyncratic factors that seemed likely to have only transitory effects on inflation, including unusually sharp declines in the prices of apparel and of portfolio management services.’ However, ‘Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee’s symmetric 2 percent objective’.  This suggests the Fed is in a ‘wait and see’ mode on inflation and hopes of low inflation readings, prompting an imminent rate cut, look to be misplaced at this stage.

The minutes also highlighted that for a number of participants the risks and uncertainties surrounding their outlooks had moderated, although uncertainties remained. Although this looks to be out to date: since the meeting risks to growth from protectionism have appreciably increased with a setback in US-China trade negotiations due to the US increasing tariffs and China retaliating. Plus, the US has escalated the situation further taking a draconian approach by blacklisting the sale of American technology to number of Chinese technology related companies without a special license: first Huawei (with a 90-day reprieve) and then with talk of Hikvision, a surveillance firm, and DJI, a drone company, also being added to the list.

The market response to the minutes was pretty muted with the S&P 500 down 0.28%, USTs rallying a bit: the UST 10 year yield closed at 2.38%. At the time of writing the Fed futures are pricing ~75% chance of a US rate cut by the end of the year likely reflecting heightened risks from protectionism to the growth outlook.

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