Since the Fed began its hawkish approach in March, there have been 4 rate hikes totalling 225 bps up to the July meet. On 17th August, the minutes of the FOMC meet concluded on 27th July were released. The one theme that comes out from the minutes is that the members of the FOMC are unhappy with the fall in inflation. Of course, this does not include the 60 bps fall in July, but that is unlikely to have left the members too impressed.
Out of the 225 bps rate hike in 2022, a total of 150 bps hike was done in just 2 tranches in June and July. That shows the extent of front loading that the Fed is prepared to do. Fed rates are now in the range of 2.25% to 2.50% and is already in neutral zone. Beyond this level, rate hikes would curb inflation and output with the same ferocity. It is going to be a much tougher trade-off for the Fed from here on.
However, there is some hope in the language of the Fed minutes. While the Fed may not relent on its inflation fight in 2022, the pace of rate hikes may taper. In 1981, when inflation was at current levels, the Fed rates were in double digits. Today, the Fed rates are around 600 bps below the average rate of inflation. That is what the Fed wants to rectify.
Peak rate expectations stay at 3.75% for now
The CME Fedwatch table below captures the implied probabilities. Rates have already risen from the range of 0.00%-0.25% to the range of 2.25%-2.50% between March 2022 and July 2022. Interestingly, FOMC members expect the rate hikes to be largely done and dusted by the end of 2022. That will give the Fed enough time and leeway to undertake corrective action, if required. Here are the implied Fed rate scenarios over next 8 meetings.
Fed Meet | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 |
Sep-22 | 63.5% | 36.5% | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil |
Nov-22 | Nil | 30.1% | 50.7% | 19.2% | Nil | Nil | Nil | Nil | Nil | Nil |
Dec-22 | Nil | 5.0% | 33.5% | 45.5% | 16.0% | Nil | Nil | Nil | Nil | Nil |
Feb-23 | Nil | 3.2% | 23.5% | 41.3% | 26.3% | 5.6% | Nil | Nil | Nil | Nil |
Mar-23 | Nil | 2.2% | 17.2% | 35.8% | 31.0% | 12.0% | 1.7% | Nil | Nil | Nil |
May-23 | 0.1% | 3.0% | 18.2% | 35.5% | 29.9% | 11.5% | 1.6% | Nil | Nil | Nil |
Jun-23 | 0.8% | 6.7% | 22.2% | 34.1% | 25.7% | 9.3% | 1.3% | Nil | Nil | Nil |
Jul-23 | 2.4% | 10.2% | 25.0% | 32.2% | 21.8% | 7.3% | 1.0% | Nil | Nil | Nil |
Data source: CME Fedwatch
Apart from the routine hawkishness, some interesting trends emerge.
With the latest IMF projections indicating a clear slowdown in US growth, it remains to be seen how far the Fed can sustain its hawkishness.
It is likely that the monetary enthusiasm may get circumscribed by the gross fiscal realities. We have to wait and see.
What we gathered from the Minutes of the July 2022 FOMC meet
Here are some of the key takeaways emerging from the minutes of the July FOMC meeting, published on 17th August.
July inflation data shows the fall driven by oil. Food inflation is higher in July and core inflation is stable. Fed surely has a complex road ahead.
What do the Fed minutes mean for Indian economy
If the Fed has been hawkish, the RBI has not been neutral either. RBI has raised repo rates by 140 bps between May and July. That is almost at par with the Fed hawkishness. In addition, RBI has also hiked the base rate of SDF by 40 bps and the CRR by 50 bps. For now, the RBI has taken care of any real return edge that the US bonds may have.
How will the RBI react? In India, the inflation reaction has almost been immediate. For instance, CPI inflation has fallen 108 bps since April while WPI inflation has fallen by 270 bps since May. Fed going slow on rate hikes will be sentimentally positive for India. It reduces the dilemma for the RBI, as it can gradually direct its focus towards the growth engine.
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