At 2:00 a.m. Beijing time on Thursday, the Federal Reserve released the minutes of its April FOMC meeting. Overall, the minutes show that it will take some time before substantial progress is made. Officials judged the current policy stance and forward guidance to be appropriate.
Six key points from the minutes of the Fed’s April meeting
①Some officials expect the Fed to begin discussing QE tapering at a future meeting
On tapering, officials at the April meeting were cautiously optimistic about the domestic economic recovery, while some officials hinted at a willingness to discuss contracting the bond purchase program “at some point.
“Many participants believe that if the economy continues to make rapid progress toward the FOMC’s goals, it may be appropriate to begin discussing plans to adjust the pace of asset purchases sometime in the next few meetings.”
But at the same time, the minutes also mentioned that various participants noted that it may be some time before the economy makes further substantial progress toward its goals of full employment and price stability.
②Some officials believe that inflation will rise above 2% in the near term due to the base effect
On inflation, several officials raised the risk of inflation rising to an “undesirable” level to a level that would clearly trigger a policy response. Several officials noted that fiscal stimulus, vaccine progress, suppressed demand and high levels of savings will continue to support consumer spending.
Some officials believe that inflation will rise above 2% in the near term due to base effects. Supply chain bottlenecks and input shortages may not be resolved soon, and these factors may put upward pressure on prices later in the year.
However, officials generally expect inflation to ease after the short-term effects subside. Over time, inflation will come into line with the Fed’s Monetary Policy Committee’s target.
③ Downward pressure on the overnight rate may lead to consideration of modest adjustments to the managed rate
Regarding interest rate management, the minutes show that the System Open Market Account (SOMA) manager noted that downward pressure on overnight rates in the coming months could lead to the need to consider modest adjustments to the managed rate.
This could ultimately lead to a greater share of the Fed’s balance sheet expansion going to overnight reverse repurchase agreement instruments and other Fed liabilities. Managers noted that more than half of respondents expect to make adjustments to the managed rate no later than the June policy meeting.
④ Risks to the economic outlook are not as high as in previous months, and it will take some time before substantial progress is made
Regarding economic performance, officials agreed that economic activity and employment indicators have strengthened, and that continued progress on vaccination and accommodative monetary and fiscal policies is highly likely to consolidate further growth in economic activity and employment and limit risks to the economic outlook.
However, the U.S. economy is currently far from the Federal Reserve’s target, the public health crisis continues to put pressure on the economy, and the recovery may be uneven given the new strains of the virus and potential hesitancy about vaccination. The path of economic development will depend in large part on developments in the epidemic, including progress on vaccination.
⑤ Increased labor demand has already begun to bring some upward pressure on payrolls
Regarding the job market, some officials noted that the labor market recovery remains uneven across demographic and income groups and across industries. Many officials indicated that businesses are having difficulty hiring employees, which may reflect early retirement, health issues, child care responsibilities, and the expansion of unemployment insurance benefits.
Some participants noted that their contacts said that increased labor demand had begun to put some upward pressure on wages.
(6) Falling asset prices could adversely affect the real economy if risk appetite declines
Several officials noted that risk appetite in capital markets has increased as equity valuations have risen further, IPO activity has remained high, and risk spreads on corporate bonds are at the bottom of their historical distribution.
Two officials noted that falling asset prices could have a negative impact on the real economy if risk appetite declines.
Some officials cited potential risks to the financial system from hedge funds, short-term financing, and operating funds in the credit markets.
Overall, the minutes of the April FOMC meeting had 33 mentions of the keyword “risk (risk)”, while the minutes of the March meeting had only 17 mentions of “risk”.
Market reaction and Wall Street interpretation
After the release of the minutes, the U.S. dollar index was higher in the short term, up 0.50%, non-U.S. currencies continued to move down, the euro against the U.S. dollar down 0.50%, the Australian dollar against the U.S. dollar fell by 1% at one point.
U.S. Treasuries were lower, with huge volume in the Treasury futures market. The U.S. 10-year Treasury yield set a new daily high, once rising above 1.69%, the highest level since a week. The two-year and 10-year U.S. bond yield spread curve once became steeper to 152 basis points.
Spot gold once fell below $1870 per ounce, a cumulative drop of $12 to a low of $1861.95 per ounce, then recovered; spot silver fell to a low of $27.46 per ounce. the most active gold futures contract COMEX Beijing time May 20, 02:04 a minute trading plate instantly traded 2,713 lots, the total value of contracts traded 509 million U.S. dollars.
The three major U.S. stock indexes that had narrowed losses turned short downward, the decline once expanded, the Nasdaq 100 index once fell 1.7%, but in the chip stocks against the market higher and some leading technology stocks such as Google turned up mid-day support, technology stocks for the heavy Nasdaq and Nasdaq 100 index had turned short up at midday. At the close of trading, the three major U.S. stock indexes collectively closed lower.
This Federal Reserve minutes have stimulated market discussions on tightening monetary policy, and traders have raised their expectations for a Fed rate hike. The European dollar futures market now expects that the Fed could raise rates by about 20 basis points by the end of 2022, about four-fifths of the standard 25-basis-point rate hike. Traders also believe the rate hike could add an additional 2 basis points by 2022.
Analyst Cameron Crise commented that the Fed minutes reflect a meeting held prior to the release of the recent nonfarm payrolls and inflation reports, so in a sense, the meeting’s perspective is already a bit old. News headlines about the timing of tapering bond purchases are generating a flurry of reactions, but this should not be unexpected for the market. He said.
“When you think about it, it would be unusual if they didn’t start talking about it in the upcoming meeting.”
Analyst Chris Anstey, on the other hand, believes that so far, the Fed does not seem to have enough reason or evidence to support its strong signal in June that debt tapering is coming. This is especially true given the disappointing employment and retail sales data in April.
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