The minutes of the FOMC’s meeting in late January has all but confirmed another 25bps increase to the federal funds rate at its next meeting in late March. While the minutes did not add anything of a controversial or unexpected nature, they did reinforce the view the Fed would raise its official rate several times this year.
Financial markets reacted by sending U.S bond yields and the USD higher. 2 year bond yields gained 4bps to 2.26%, 10 year yields increased by 6bps to 2.95% and 30 year yields rose by 7bps to 3.22%. The USD strengthened by between 0.4% and 1.0% against all major currencies.
According to Philip Brown, a senior fixed-income strategist at Commonwealth Bank, the minutes “showed the Fed is increasingly confident on the economic and inflation outlook…” and they “also reinforced the growing FOMC optimism and ongoing hawkish intentions as outlined in previous communications – including the widely expected rate hike in March.” What’s more, Brown pointed to a section of the minutes which states “a majority of participants noted a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate”. Data regarding economic activity since the December’s FOMC meeting had been stronger than anticipated and rate rises are likely to be required.
