Financial Services Association, May 23 (Editor: Xiaoxiang) Many people are most impressed by the Federal Reserve's interest rate decision in early May. It is no doubt that Federal Reserve Chairman Powell vowed at the post-meeting press conference that the Fed's next move is unlikely to be to raise interest rates.

However, the minutes of the US Federal Reserve's May meeting recently released overnight showed that Powell's “dovish” statement at the time probably largely covered up the voices of hawkish officials. The minutes show that “many” Federal Reserve officials questioned whether the restrictive nature of the policy was enough to reduce the inflation rate to the target level, and many officials mentioned their intention to further tighten the policy if necessary...

As soon as this US Federal Reserve minutes “uncovering the details of the meeting” were released, it directly caused the US stock, US debt, and commodity markets to generally be under pressure overnight. The market's expectations that the Fed would cut interest rates twice during the year were also clearly hit overnight...

Did the Federal Reserve minutes “burst the basket” last night?

According to the latest minutes of the US Federal Reserve's May meeting, Fed officials generally stated at the last policy meeting that if the inflation data continues to disappoint, interest rates may remain high for a longer period of time, while some policy makers have even discussed their intention to raise interest rates further when needed.

The minutes showed that although participants believed that the current monetary policy was “well positioned,” many officials mentioned their intention to further tighten the policy if necessary. These officials said that once the risk of inflation becomes a reality and it is suitable for further policy tightening, they are willing to act in this way.

The minutes of the meeting said, “Participants noted that the inflation readings for the first quarter were disappointing. It will take longer than previously anticipated to have greater confidence that inflation will continue to move towards the 2% target”.

Regarding the interest rate policy, officials think the policy is generally restrictive, but policymakers point out that high interest rates may have less impact on the economy than in the past. They also said that long-term neutral interest rates may be higher than previously thought. “Many participants expressed uncertainty about the extent of the restrictions.”

Officials also discussed issues such as keeping interest rates stable for a longer period of time if the inflation rate shows no signs of continuing to move towards 2%; reducing policy restrictions if labor market conditions unexpectedly weaken.

Federal Reserve Chairman Powell said at a press conference on May 1 that the current monetary policy is clearly restrictive. Over time, he expects the current interest rate level to reduce the inflation rate to the Federal Reserve target of 2%. At the same time, he added that the Federal Reserve's next move is unlikely to raise interest rates.

Powell later reiterated at an event in Amsterdam on May 14, “We need to be patient and let restrictive policies work.”

Obviously, the minutes of the latest meeting provide a more detailed description of the real views within the Federal Reserve on the current interest rate situation.

Subadra Rajappa, head of US interest rate strategy at Societe Generale Bank, said: “The minutes of the meeting seemed a bit more hawkish than what we heard Powell's speech at the post-conference press conference. They (Federal Reserve officials) seem clearly concerned about inflation, and they are more open to raising interest rates when necessary, which means maintaining a policy of maintaining high interest rates for a longer period of time.”

Torsten Slok, chief economist at Apollo Global Management (Apollo Global Management), also said that the minutes of the meeting were indeed “somewhat inconsistent with the content of Powell's press conference.”

US stocks, US debt, and commodity markets plummeted

Since the latest Federal Reserve minutes showed continuing concerns about inflation and raised more questions about whether the Fed officials would raise interest rates again and when they might cut interest rates, the US financial market was generally under pressure after the release of the minutes on Wednesday.

By the close, the S&P 500 index fell 0.3% and the Nasdaq Composite Index fell 0.2%. Both indices closed at record highs on the previous trading day. The Dow, on the other hand, fell by about 200 points, or 0.5%, making up the worst single-day performance this month, taking back the gains of the past week.

Judging from the trend throughout the day, the stock market lacked direction for most of the intraday period, but it clearly weakened after the release of the minutes of the Federal Reserve meeting.

In the bond market, most US bond yields of various matures closed higher overnight. Among them, 2-year US Treasury yields rose 4.1 basis points to 4.88%, 5-year US Treasury yields rose 2.9 basis points to 4.469%, 10-year US Treasury yields rose 1.1 basis points to 4.428%, and 30-year US Treasury yields fell 1.1 basis points to 4.541%.

The US Treasury bid sold 16 billion US dollars of 20-year Treasury bonds on Wednesday. The bid interest rate was 4.635%, which is close to the yield level of the pre-bid secondary market. The bid multiplier was 2.51, the lowest since February.

While both US stocks and US bonds are under pressure, the “Periodic Table of Elements” market, which is unrivaled in the commodity market, has recently come to a standstill. Spot gold prices fell sharply on Wednesday, the biggest one-day decline since April; copper also fell by more than 4%, and once fell by more than 6% in the New Zealand copper market, which hit a record high.

This all came against the backdrop of a rebound in the US dollar. The ICE dollar index, which tracks the exchange rate of the US dollar against a basket of six major currencies, including the euro, rose above 104.90 on Wednesday. It rose about 0.3% on the same day and rebounded to a one-week high.

Amarjit Sahota, head of foreign exchange risk management company Klarity FX in San Francisco, said, “The minutes confirm what most traders were already thinking before the US CPI report was released a week ago. In other words, FOMC members were increasingly frustrated by the disappointing inflation data for the first quarter, and some officials were willing to further tighten policies, which further boosted the dollar after the release of the minutes.”

Judging from the pricing of the interest rate market, after the release of the Federal Reserve minutes on Wednesday, traders currently only expect the Fed to cut interest rates by 40 basis points during the year — it is once again quite uncertain whether two interest rate cuts can be achieved.

Of course, what may still be comforting to some investors for the time being is that after all, the newly disclosed minutes reflect only internal discussions at the time of the Federal Reserve meeting three weeks ago. Last week, the US core CPI cooled down again after a lapse of six months, and the level of concern in the industry about the inflation situation was not as serious as when the Federal Reserve met at the time. This may also indicate that although this report is clearly hawkish at first glance, its influence on the market may not last long, especially in the context where the focus of the stock market has turned to Nvidia's earnings report.

The Federal Reserve's next interest rate meeting will be held on June 11-12, local time. At that time, the Federal Reserve will release the latest interest rate bitmap forecast. There may be a more clear answer to the question of how and how many times the Federal Reserve will cut interest rates during the year.

Editor/Somer

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