US: FOMC Minutes (almost) confirmed 50 bps hikes – UOB

UOB Group’s Senior Economist Alvin Liew and Rates Strategist Victor Yong review the latest release of the FOMC Minutes of the May meeting.

Key Takeaways

“The three key takeaways from the minutes of the May 2022 FOMC were, 1) 50bps rate hikes will be necessary at the next couple of meetings to rein in inflation and that Fed policy may have to move beyond ‘neutral’ into ‘restrictive’ stance (but one point to note there was no indication of more hawkish intentions such as 75bps hike), 2) Fed policymakers remain very confident about the strength/fundamentals of the US economy and therefore near-term recession risks are low and its immediate objective is to tame inflation, and 3) There are downside risks to policy tightening, and by expediting the removal of policy accommodation the Fed will give itself policy flexibility at year-end.”

“The overarching message from the Fed remained centered on inflation with 60 specific mentions in the minutes and highlighted Russia-Ukraine conflict and China’s COVID-related lockdowns and their impact on prices and growth outlook. Some Fed policymakers suggested that the overall price pressures may no longer be worsening but cautioned it is too early to tell, and that inflation remains elevated.”

“Quantitative Tightening [QT] will start on 1 Jun 2022 and while all participants supported the plans for reducing it, a number of participants said it would be appropriate for the FOMC to consider active sales of agency MBS, so that it will hold primarily US Treasuries in the long run, adding that any sales of MBS will be announced well in advance.”

“FOMC Outlook – Affirming expectations for 50bps hikes in Jun and Jul FOMC: Given the clear indications for on-going hikes to combat inflation spelt out in the May FOMC minutes but no intentions of cranking up the size of the hikes, we are comfortable to maintain our FFTR forecast for another 50bps each in the June and July FOMC. We continue to expect 25bps in every remaining meeting of this year. Including the Mar FOMC’s 25bps hike and May FOMC’s 50bps hike, this implies a cumulative 250bps of increases in 2022, bringing the FFTR higher to the range of 2.502.75% by end of 2022, a range largely viewed as the range for neutral stance. We maintain our forecast for two more 25bps rate hikes in 2023, bringing our terminal FFTR to 3.00-3.25% by mid2023.”