The Federal Reserve’s recent meeting revealed that most officials want to slow the pace of interest rate hikes, causing markets to rally. However, slowing the pace of rate hikes is not the same as lowering rates themselves, and the Fed’s plans regarding interest rates are scrutinized by investors. The minutes reveal that the Fed is planning to raise interest rates higher than it had previously planned, from 75 basis points to 50 basis points, which confirms the Fed’s intention to slow the pace of rate hikes. The Fed also discussed the tight labor market and the increase in the personal consumption expenditures index.
Understanding the Federal Reserve’s Minutes from its Recent Meeting
Last week, the Federal Reserve published the minutes, which summarized its most recent meeting. The minutes revealed that most fed officials want to slow the pace of interest rate hikes going forward. The news caused markets to rally on the possibility that the FED will pivot. However, slowing the pace of rate hikes is not the same thing as lowering rates themselves, and the headlines don’t tell the full story. Let’s take a closer look at the Fed’s most recent minutes and summarize what they say in simple terms.
Background on the Federal Reserve
The Federal Reserve is the Central Bank of the United States, consisting of 12 regional banks that are scattered across the country, each with its own president. The FED is governed by seven governors, which include Fed chairman Jerome Powell. The central bank’s monetary policy is decided by the Federal Open Markets Committee (FOMC), consisting of the Fed’s seven governors, the president of the New York Fed, and four of the other presidents of the Fed’s other regional banks.
The FOMC Meeting
All 12 FOMC officials were present at the Fed’s last meeting, along with around 50 other academics and economists who work for the FED, including members of the Fed’s other regional banks. The FOMC discussed how they’re planning to raise interest rates higher than they had planned in September, something that Jerome had told the public in the fed’s subsequent press conference. However, most FOMC officials see a 50 basis point hike as being appropriate at the Fed’s next meeting for context. This confirms that the FED is planning on slowing the pace of rate hikes.
The FOMC officials discussed the surprisingly positive GDP print for Q3 in the United States, the continually tight labor market, and the increase in the personal consumption expenditures index or PCE—the Fed’s favorite inflation gauge. The Fed went on to discuss how labor market conditions are looking for different minority groups and seemed to blame most of the economic issues we’re facing on the war in Ukraine, China’s zero covert policy, and tighter financial conditions as a result of higher interest rates.
The FOMC seemingly took issue with the recovery in the stock market that started in mid-October, which challenged the Fed. Investors have been selling off foreign assets and deploying that dry powder into U.S assets, mainly U.S government debt. This makes sense given that U.S government debt is providing increasingly higher interest rates and is also considered to be the safest asset in the eyes of institutional investors. In addition, the rising interest rates on credit card debt in the United States is concerning, as credit card debt recently hit an all-time high of over 930 billion dollars. The housing market continues to slide on the back of rising interest rates, and banks are becoming less eager to lend.
The Fed’s minutes provide insight into the FOMC’s discussions and planning regarding interest rates. Slowing the pace of rate hikes is not the same as lowering rates themselves. The FOMC discussed how they’re planning to raise interest rates higher than they had planned in September, but most FOMC officials see a 50 basis point hike as being appropriate at the Fed’s next meeting. The financial conditions suggest that the dollar milkshake theory proposed by Brent Johnson may come into play, where most of the world’s money will flow into the US, leading to the collapse of US assets and the US dollar. Overall, these minutes give a detailed view of the Fed’s economic discussions and plans for the coming months, providing investors with insight into what to expect from the markets.