On the evening of February 22, 2023, the FOMC Minutes were released, containing important statements about the Federal Reserve's current monetary policy and plans for future rate hikes. Let's take a look at the highlights.
The Federal Reserve officials’ meeting on January 31st to February 1st this year, concluded with a smaller rate hike than those implemented in 2022. However, the officials stressed their concern that inflation is high, indicating the need for more interest rate increases. The minutes of the meeting, released on February 22, show that inflation "remained well above" the Fed's 2% target, while labor markets “remained very tight, contributing to continuing upward pressures on wages and prices."
More Rate Hikes are Necessary
The minutes from the meeting show that the Fed approved a 0.25 percentage point rate increase, bringing the fed funds rate to a target range of 4.5% - 4.75%. Although the rate hike was the smallest since March 2022, the Fed indicated the need for ongoing rate hikes. The officials believe that more evidence of progress across a broader range of prices would be required to be confident that inflation is on a sustained downward path.
“Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes said.
Stocks Fall, Treasury Yields Shed Losses
Following the release of the FOMC minutes, stocks fell while Treasury yields shed most of their losses from earlier in the session.
In particular, key US indices were down the morning after the minutes:
📉 Dow Jones ($DOW30)
📉 Nasdaq ($NAS100)
📉 SPX500 ($SPX500)
At the same time, the US Dollar appreciated slightly against other currencies (in particular, the EUR/USD rose 🔺).
Push for More Aggressive Policy
Since the meeting, regional Presidents James Bullard of St. Louis and Loretta Mester of Cleveland have emphasized the need to stay vigilant, even while expressing optimism that recent inflation data has been encouraging. In a CNBC interview on February 22, Bullard repeated his belief that going higher sooner would be more effective, but he thinks the peak or terminal rate should be around 5.75%.
Market Pricing Indicates Likely Rate Increase in March
Market pricing still indicates the strong likelihood of another quarter-point increase in March, followed by a couple more to bring the funds rate to a peak of 5.25% - 5.5%. However, if the Fed moves too quickly or far, it could tip the economy into a recession, a risk that "some" members see as "elevated."
Summary
The FOMC minutes released on February 22 reveal the Fed's concern over inflation is high, and ongoing rate hikes will be necessary. While the Fed approved a 0.25 percentage point rate increase, it still believes that more evidence of progress across a broader range of prices is required to be confident that inflation is on a sustained downward path. Although some officials believe that the risk of recession is elevated, others think the Fed can avoid a recession and achieve a "soft landing" for the economy.
