Please see todays Daily Investment Bulletin from Brooks Macdonald:
What has happened
Despite a slightly more upbeat tone to US markets at the start of the day, indices ultimately fell slightly on the back of the release of the latest Federal Reserve minutes. The Federal Reserve terminal rate crept up towards 5.4% after this release while European equities also fell after catching up with the market losses seen late on Tuesday.
Federal Reserve minutes
There has been quite a bit of water under the bridge since the latest Fed meeting, including the strong US jobs report and the stickier US CPI print. Markets were however keen to glean the consensus of the committee and whether it matched the more dovish interpretation given by Fed Chair Powell in the press conference. On the decision to downshift to 25bp interest rate hike increments, this was supported by ‘almost all’ participants.
Prospect of tighter policy
Despite the broad agreement on the downshift, the minutes show significant concerns that insufficiently tight monetary policy now could lead to sticky inflation, a risk that has heightened since the meeting. Specifically, the minutes said that the Fed ‘observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period and pose a risk of inflation expectations becoming unanchored.’ Overall, the minutes echoed the more cautious and hawkish central bank narrative that has been expressed by many of the Fed’s voting members in subsequent interviews and press events. President Williams for example yesterday said that he did not want the ‘inflation expectations anchor to slip’, which may require a tougher short term monetary policy response in light of the recent robust economic data.
What does Brooks Macdonald think
The market has largely come towards the Fed’s position over the last few weeks given the stronger economic data. This means that the meeting minutes’ focus on the risks of prematurely loose financial conditions chimes with the bond market’s pricing. One of the metrics that has been highly volatile is the 2-year inflation breakeven which, after approaching 2% around a month ago, now implies an average inflation level of 3%. The Fed will be keen to push that number lower by stressing its commitment to fight inflation.
Please continue to check our Blog content for advice, planning issues and the latest investment, markets and economic updates from leading investment houses.
Andrew Lloyd DipPFS
23/02/2023