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The December 14th interest rate announcement from the Federal Reserve will be marked down as the first time the Fed acknowledged that rates had likely reached their peak after an historic tightening cycle, alongside the first time Chair Powell openly suggested that policymakers were deliberating when it will “become appropriate to begin dialling back the amount of policy restraint in place.”

In fact, Powell went one step further in the press conference as he passed up the opportunity to directly reign in market pricing of the Fed’s implied easing path towards that indicated by the median projection after a loaded question from the Wall Street Journal. In conjunction with the updated Summary of Economic Projections now indicating an additional rate cut as the median expectation for 2024, the December meeting was viewed by traders as validating the markets more bearish short-term view on US rates. This extended the trend of loosening financial conditions that had taken place since mid-November, with money markets closing the year out with a base case of a March rate cut and a cumulative 160bps of easing priced in for 2024.

Since Powell’s press conference, however, members of the FOMC have been actively trying to push back on the market’s dovish view.

The most notable FOMC member to do so was John Williams, who labelled a March rate cut as “premature” and dismissed the idea that policymakers openly discussed the timing of a rate cut as alluded to by Powell just days earlier. This sentiment was echoed in today’s minutes, which saw some participants warn that “circumstance might warrant keeping the target range at its current value for longer than they currently anticipated”, while no reference was made to an open discussion about the timing and viability of rate cuts as suggested by Powell’s comments in the press conference. This more cautious stance in their deliberations reflected the risk that “an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its inflation goal.” While a number of participants did note the downside risks to the economy that would be associated with an overly restrictive stance and the potential conflict that could arise in trying to actively achieve both sides of the Fed’s dual mandate, the minutes generally read as more hesitant than the overall tone of the December announcement.

Of final note, some participants suggested that it would be appropriate for the Committee to begin discussions on the technical factors that would guide the Fed’s QT plans, with those participants suggesting a tapering of the pace in which its balance sheet is reduced before the level judged consistent with ample reserves in order to avoid a 2019 repeat.

All told, the market reaction to this latest round of minutes was simply to shrug and move on. Having already pared back easing bets in response to hawkish Fedspeak, traders were content to discount the minutes as old news. As such, though the release triggered an initial spike in yields, Treasuries were ultimately left unmoved, and bets on 2024 easing remained hovering around 150bp. Similarly, despite an uptick for the dollar on the release, the greenback’s rally was soon tempered, leaving G10 FX pricing on the day largely reflective of a retracement of the late December moves.

 

 

Authors:
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst

 

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