FOMC Minutes: Fed keeps options open

With all the talks and drama surrounding the US debt ceiling it is easy to lose sight of what’s going on in terms of US rates. The latest STIR market pricing has a 66% chance that the Fed will be on hold in June. Powell has recently hinted at the possibility of a June hold, so what is the latest we can discern from Wednesday’s FOMC minutes.

Uncertainty reigns

The minutes show that there is now uncertainty regarding whether or not more rate hikes are needed. The problem the Fed has is that if they hike interest rates too high then that will restrict the US economy. Yes, it makes it easier to deal with inflation, but the risk is that the economy is cooled too quickly. This is why some members were uncertain. Some members thought that the return to 2% inflation could be unacceptably slow and more hikes were needed. Other members said that further policy tightening might not be needed if the economy developed broadly in line with their outlook. Still others saw that it was crucial that rate cuts were not signalled this year. So, the minutes were quite a mixed bag.

Banking sector fears

These were acknowledged, but downplayed. The bank sector was recognised as being well capitalised overall and seen as sound and resilient. However, the participants assessed that the bank sector stress would weigh on overall sentiment, but to an uncertain extent.

Labour market

They noted some signs that the imbalance in the supply and demand in the labour market was easing with prime-age labour force participation returning to its pre-pandemic level. There were further reductions in the rates of job openings and quits noted.


There was little reaction to the FOMC minutes which makes sense with US debt ceiling talks eclipsing them. However, the recent Fed communication and the need for the Fed to stress optionality after the May meeting would lean more towards a coming rate pause for June. That would give participants some time to assess the impact of the interest rate hikes that there have already been. Fed’s Waller also pointed out this week that April’s PCE inflation print and May’s CPI will be critical for the Fed. So, a high print in either of these and markets will be upping the chances of a rate hike from the Fed in June again. The DXY remains very strong on all the risks circulating at the moment with two key weekly levels marked below.