Key takeaways from the Fed minutes of June meeting

The Fed published minutes of the June Fed meet on 07 July, capturing the gist of the discussion among members of the Federal Open Markets Committee (FOMC). Before going to the takeaways from the Fed Minutes, let us first look at what the US Fed Futures indicate about the probabilities of rate hikes over the next 12 Fed meets.

Jul 08, 2021 08:07 IST India Infoline News Service

The Fed published minutes of the June Fed meet on 07 July, capturing the gist of the discussion among members of the Federal Open Markets Committee (FOMC). Before going to the takeaways from the Fed Minutes, let us first look at what the US Fed Futures indicate about the probabilities of rate hikes over the next 12 Fed meets.

Fed Meets Probability (status quo) Probability (25-50 bps) Probability (50-75 bps) Probability (75-100 bps) Probability (100-25 bps)
28-Jul-2021 100.00% -Nil- -Nil- -Nil- -Nil-
22-Sep-2021 100.00% -Nil- -Nil- -Nil- -Nil-
03-Nov-2021 100.00% -Nil- -Nil- -Nil- -Nil-
15-Dec-2021 95.60% 4.40% -Nil- -Nil- -Nil-
26-Jan-2022 95.60% 4.40% -Nil- -Nil- -Nil-
16-Mar-2022 90.20% 9.60% 0.30% -Nil- -Nil-
04-May-2022 88.20% 11.30% 0.50% -Nil- -Nil-
15-Jun-2022 75.20% 22.60% 2.10% 0.10% -Nil-
27-Jul-2022 67.30% 28.10% 4.30% 0.30% -Nil-
21-Sep-2022 55.40% 35.00% 8.60% 1.00% 0.10%
02-Nov-2022 49.70% 37.00% 11.30% 1.80% 0.20%
14-Dec-2022 33.40% 41.00% 19.90% 5.00% 0.80%
01-Feb-2023 29.50% 40.00% 22.40% 6.80% 1.30%
Data Source: CME Fedwatch (current Fed Rate is 0-25 bps)

One thing follows from the above table; the CME which trades the Fed Futures, is pricing in a maximum of two rate hikes by the end of 2022. The market appears to be divided and tentative about the trajectory of rates till May 2022. However, by June 2022, there is a strong expectation of a 25 bps rate hike. By the end of 2022, the probability of a 50 bps rate hike is almost as high as 22.4%. These are dynamic numbers and keep changing as fresh data comes along. But the message from the Fed Futures market is that the Fed could undertake 25 bps rate hike in the first half of 2022 and another 25 bps hike in H2-2022.

Key takeaways from the Fed Minutes of 16-Jun Meet

Here are some key takeaways from the Fed meeting minutes published on 07 July.
  • The broad message appears that while all the Fed officials did talk at length about tapering and possible rate hikes, there was no consensus on any kind of time line, nor were the members in a hurry to start off with the taper. The discussion on taper was more at an academic level rather than about timelines.
  • While most members agreed that the economy recovery was rapid as was the rapid rise in inflation, nobody referred to the Fed taking its foot of the liquidity pedal. The broad view was that the so-called “substantial further progress” was still missing.
  • One key takeaway was that the members virtually assured the bond markets that any taper, or plans to taper, would come with advance forewarning. That meant that a taper is not even being considered at the current juncture.
  • As experts on monetary policy have assessed; there was limited support to starting the taper of the asset purchase program any time soon. In short, the tone of the Fed members appeared to be a lot less hawkish than was originally anticipated.
  • Currently, the taper is to the tune of $120 billion per month consisting of $80 billion of treasury buying and $40 billion of MBS buying. In the post-meeting conference on 16-Jun, Powell had hinted at discussions on reducing the pace of bond purchases. However, the minutes don’t appear to have betrayed any such emotions among members.
  • However, one outcome that is evident is that the Fed has managed to change market expectations of a rate hike from mid-2023 to mid-2022, which is also evident in the Fedwatch probabilities.
  • The immediate picture from the Fed minutes showed a largely divided Fed. While one set of Fed members were worried about inflation rising faster than expected, another set was sanguine about unemployment way above 4.5%. The evolving consensus in this case was more about pragmatism and not rattling the boat.
  • In a nutshell, while there was little progress on any decision about the taper or rate hikes, one thing is clear that members of the Fed had started a debate on taper and rate hikes in right earnest.
What do these Fed minutes imply for Indian markets?

While the 8 Fed meetings a year will continue to give hints of monetary policy, the markets would be watching the forthcoming annual Fed Research meet at Jackson Hole, Wyoming. Normally, that meeting sets the pace and tone of US monetary policy.

Chart Source: Refinitiv

India should be focusing on this chart which captures the 10-year bond yields in the US. The market consensus in the last few months is that in the midst of uncertainty, the Fed may choose to err on the side of caution and maintain status quo on rates and taper. Of course, what India needs to be prepared is a likely taper commencing in 2022 and rate hikes by mid-2022. That would impact RBI policy trajectory as well as the billions of passive liquidity rushing into India. For 2021, it does not look like the status quo story would really change. That is the good news!

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