June 2023 Fed Minutes Digest
The Fed minutes came out this afternoon for the June 13-14th meeting, with the following key highlights to digest:
Financial Market Developments: Policy-sensitive rates increased over the intermeeting period due to indications of continued resilience in the economy, persistently elevated core inflation, and reduced downside tail risks following the resolution of the debt limit.
The increase in nominal yields primarily reflected higher real rates rather than inflation compensation. Broad equity prices rose, although the outperformance was concentrated in a few companies with a large market capitalization.
Open Market Operations: The majority of respondents to the Open Market Desk's Surveys of Primary Dealers and Market Participants expected no rate change at this meeting.
While the median path from the surveys pointed to no rate changes through early 2024, there was significant dispersion across respondents, and respondents saw a clear probability of additional tightening at coming meetings.
Money Market Developments: The median respondent to the Desk surveys expected the three-month bill yield to increase slightly relative to the similar-maturity overnight index swap (OIS) rate and to remain above it into the fourth quarter.
This expectation likely reflected a combination of rising net supply of bills as part of the Treasury Department's plan to rebuild the Treasury General Account (TGA) following the resolution of the debt limit and expectations for healthy investor demand for bills.
Economic Outlook: Desk survey respondents still saw a recession occurring in the near term as quite likely, but the expected timing was again pushed later, as economic data pointed to the continued resilience of economic activity. Overall, respondents generally continued to expect that any downturn would be neither deep nor prolonged.
Inflation Expectations: Respondents marked up their projections for quarterly core personal consumption expenditures (PCE) inflation in the second and third quarters of this year, while projections for later quarters were little changed.
In summary, the Fed is likely to hike at least once, if not twice. The next hike is priced in for July with near certainty, but futures have yet to price in a second hike. They are also currently pricing in the first cut in May, which had been priced for March earlier.
