The Fed Minutes Are Here. 4 Key Themes to Watch.

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Minutes of the May meeting of the Federal Reserve can be read Here, Read a preview below and check back for more analysis.

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When the Federal Reserve releases minutes from its most recent policy meeting on Wednesday, investors will get an in-depth look at deliberations on monetary-policy tightening and the views of economy officials.

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During the meeting that ended on May 4, the Federal Open Market Committee, the policy arm of the Fed, raised its main policy rate by 0.5%. It was the first increase of that magnitude since 2000. Officials have indicated a similar increase in June, and Wall Street expects a further 0.5% increase in July. But what happens after the June 14-15 meeting is less certain and will depend on the trajectory of inflation, economic growth and financial conditions.

Here are some things to look out for in this week’s minutes and in comments from central bankers for the next policy meeting and beyond.

financial conditions

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When Fed officials and economists talk about “financial conditions,” they are referring to things like stock-market levels and corporate-bond spreads. They are some of the transmission mechanisms of monetary policy, affecting households and businesses through the money effect and the cost of credit.

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Since the last Fed meeting, financial conditions have become increasingly tight. Investors are looking for clues as to how much the central bank would like to drop further stocks and widen credit spreads. Deutsche Bank economists note that in his post-meeting press conference last month, Fed Chairman Jerome Powell referred to “financial conditions” 16 times, a sign that the topic was the focus of the meeting.

“Powell and his colleagues focus more on tight financial conditions as a replacement for whether the fed funds rate will need to reach restrictive levels over time,” say economists at Deutsche Bank. Which means financial conditions are important. To predict how far higher rates will move – and when they might start to reverse. Economists there and elsewhere say the Fed probably wants the fiscal position to remain tight, at least for now, given how high inflation is playing out.

For context, economists at Goldman Sachs say their GS US Financial Conditions Index rose nearly 0.6% to 99.29 over the past week. About a month ago, the metric was 98.64; At the beginning of the year, it was around 97.


While financial conditions are tightening, inflation is still at a four-decade high. The consumer price index rose 8.3% in April from a year ago, largely undermining expectations of the peak of inflation. While pricing pressures for goods are showing signs of cooling, shelter inflation is stubborn and rising, costs of essentials are high, and prices of services are rising.

“With the collapse in equity markets and the wide spread of credit, the US central bank is certainly getting what it wants,” says Katie Nixon, chief investment officer at Northern Trust Wealth Management. “While we have seen these situations in the past, the pace of these moves has prompted the Fed to back away from well-laid plans to tighten policy,” she says. But the Fed is unlikely to reverse course now, says Nixon, given how far behind the Fed is from the inflation curve. “The Fed has identified inflation as public enemy number one, and risks a credibility crisis if policy is changed at this point,” alluding to the idea that the dramatic market fall this time. Will not easily trigger the so-called Fed.

In its May policy statementThe Fed said inflation risk is upside, given food-and-energy commodity shortages stemming from Russia’s invasion of Ukraine and China’s COVID-related lockdowns, which exacerbated supply-chain disruptions.

In an appearance on May 17, Powell said he wanted “clear and convincing evidence” of falling inflation before slowing down the pace of rate hikes. It is valid to the second highest proof standard and requires the evidence to be highly probable, says Joseph Wang, formerly a senior trader and an attorney at the Fed’s Open Market Desk. Traders will be looking for any changes in language and tone around the expected trajectory of inflation and risks to the Fed’s forecast, which will be updated next June.

slow rise and a soft, or soft, landing

Powell has argued that the Fed may engineer a soft landing—meaning growth will continue as the central bank tightens monetary policy to combat inflation, and Wall Street mostly agrees. However, that claim has led some market participants to suspect that the Fed will be significantly tighter on inflation, setting off a stalemate of slow growth and higher prices.

Recently, Powell’s tone has changed. First he used the word “soft” instead of “soft” and then said last week that overcoming inflation could lead to a “rough” landing. “There may be some pain,” he warned.

The Fed’s May statement acknowledged a surprising decline in first-quarter GDP from a quarter earlier, but it said household spending and trade fixed investment remained strong. Recent earnings reports from America’s largest retailers challenge the dominant narrative that because consumers — about 70% of GDP — trillions in savings during the pandemic, they will prevent the broader economy from falling into recession. Still, the labor market is very tight. Economists expect the unemployment rate to drop to 3.5% when May’s figures are reported on June 3. It will match a half-century low before the pandemic and suggests wage pressure will not ease soon as employers struggle to find workers, although there are signs of increasing layoffs.

Meanwhile, rapidly rising mortgage rates are slowing demand for housing, but prices continue to rise because there is not enough inventory. Rents are about a year behind home prices, and shelters comprise about a third of the CPI, meaning it will be difficult to fight upward pressure from that range.

How the Fed sees these cross-currents will be key to predicting how aggressive policy remains in the coming months, especially as central banks begin to shrink their balance sheets.

Potential MBS Sales

The Fed has said it will begin reducing its $9 trillion balance sheet starting June 1, when it expects to generate up to $3 billion in maturing Treasury securities and up to $17.5 billion in mortgage-backed securities a month. will not reinvest the proceeds of Those caps are to increase to $60 billion and $35 billion, respectively, in September.

But some officials have suggested they will need to become more aggressive in the past two years in an effort to reduce partial quantitative easing, or pandemic bond-buying, particularly as it relates to the housing market. Shrinking its $3 trillion in MBS Holdings will be particularly difficult, given that prepayments—driven by refinancing activity—all but halt as rates rise and so the natural rolloff is slow.

Minutes of the Fed’s March meeting showed that officials discussed the potential need to sell MBS outright. Citi economists note that recent Fed talk shows that the topic was not “strongly discussed” at the previous meeting, so any indication to the contrary would represent a surprising surprise.

Write to Lisa Beilfuss at [email protected]

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