Minutes of the FOMC cites the lagged effect of the policy and prepares the ground for a slowdown, say analysts

Although the content of the minutes of the last meeting of the Open Market Committee (FOMC), released on the afternoon of this Wednesday (23), did not bring great news in relation to both the communiqué of the meeting on November 2 As with Fed Chairman Jerome Powell’s statements that day, analysts said they had reason to be more optimistic about the reduction in the pace of interest rate hikes from December onwards.

Marco Caruso, chief economist at Original, for example, considered two expressions used in the minutes to refer to the next decisions and the discussions regarding the size of the terminal rate, which will define the end of the current cycle.

He highlighted the passage in which it is stated that “a substantial majority of participants judged that a slowdown in the pace of growth was likely to be appropriate soon”, while in the discussion on the final level of the Fed Funds rate, the expression used about the uncertainty of this decision was “too many participants”. As Fed communications always cite the possibility that the duration of the cycle could be extended, the reading is that “substantial majority” is more than “many participants”.

In practice, says Caruso, Fed policymakers are signaling they are leaning towards raising the rate by 50 basis points in December, after four 75 basis point hikes. “If the Fed is looking a little more fondly at lagged interest rate impacts, it ends up being positive for equities and fixed income,” he said.

Francisco Nobre, an economist at XP, pointed out that the minutes are out of date, since they did not consider the downward surprises in the October inflation data. He also mentioned that the authorities recognized that economic, geopolitical and financial risks have increased, especially in the section that says that the next decisions will consider “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic-financial developments”.

But the most important stretch even though the “substantial majority” of the participants think that a slowdown in the pace of increase is appropriate in the near future. “Currently, the market is pricing in that the Fed will raise rates by 50 bps in December, followed by two additional 25 bps hikes, reaching the terminal rate of 5.0%. Still, we believe the Fed will stall sooner,” he predicted.

For Nobre, if the November and December numbers continue to be benevolent, the Fed may take a break after December with the rate at 4.5%. But “if inflationary pressures persist and the job market remains tight, we will likely see sequential 25bps moves in the next few meetings until the data starts to “collaborate”.

medicine or poison

Angelo Polydoro, economist at ASA Investments, the minutes show that the Fed sees expectations anchored and that it would be time to start getting worried about the risk of keeping the rate too tight both for the financial market and for activity, or if “the dose of medicine ends up becoming a poison”.

He also recalled that the Fomc meeting took place before the release of both consumer inflation (CPI) and product inflation (PPI), data that were quite benign. “The inflation data came very much in line with what they were expecting,” he said. According to him, the members of the Fed indicate that for them it makes sense to slow down and start thinking more about the “destination of the trip”.

He also sees a string of smaller 50bp hikes at least until services inflation starts to ease.

For Leandro Petrokas, director of Research and partner at Quantzed, the Fed’s minutes were in line with what the market expected, signaling that the end of monetary tightening is closer.

He pointed out that the US market interpreted this positively, with the S&P, Dow Jones and Nasdaq indices rising following the disclosure. “In Brazil, the internal scenario continues to weigh and the minutes do not have much effect. We still can’t talk about falling interest rates, but the scenario seems much more optimistic than months ago”, said the representative of the analysis house and technology and education company for investors.

For Arthur Mota, economist at BTG Pactual, the initial reading that there was little news in the minutes, in a meeting that served more to prepare the ground for the Fed to slow down the increase. He pondered that some members of the Fomc commented that they warned about the risks of high interest rates for the activity, but that the balance of inflation risks was still above what the directors had expected. In addition, the labor market is relatively tight, with wage pressure.

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