Fed is willing to 'pause' in June

Yesterday we got to know the minutes of the May meeting FOMCat which it was decided to raise interest rates by 25 basis points. To some extent, it reflects the comments we have been hearing recently from Fed officials. Some of them clearly believe that there is still a lot to be done to curb inflation. In turn, several officials believe that the Federal Reserve has already done enough.

At this point, the market is approx. 30 percent. prices a possible upward move in the following month and a reduction in the cost of money in the second half of the year.

Inflation back to target?

A June "pause" seems a bit more likely at this point, although we can't be sure about it. The notes show that there is a discrepancy as to whether further monetary tightening will be needed. “Some” members believed that, based on previous reports, the return of inflation to the target “it may still be unacceptably slow', which would mean that additional policy tightening would probably be warranted at future meetings.

We also read that several participants were of the opinion that if the economy evolved according to current projections, then tightening of monetary conditions will not be necessary. Now the question is how many Fed officials are the "some" group and how many are the "few" and who therefore has the upper hand. It is also worth noting that "many participants" express the need to maintain optionality after this meeting and condition further decisions on incoming macro data.

Fed officials assessed that inflation remains very high, although they stated that the risk to the economy's outlook is "weighted down". The Minutes states that Federal Reserve officials believe that the effects of the expected further tightening of bank lending, given already tight financial conditions, will lead to a mild recession beginning later this year, followed by a moderate recovery.

The minutes reflect a sort of balance in the Fed's comments in recent weeks. As for Powell himself, he personally tends to pause. This is also clear from the last press conference after the meeting and from his statement last Friday.

First cut in September

Of course, there is no shortage of strongly "hawkish" words. James Bullard is in favor of two more hikes this year - although he himself is not currently voting. Meanwhile, Kashkari and Waller, who currently have the floor, suggest that it is premature to declare that the tightening cycle is over.

However, it seems that the option to skip the June meeting and reconsider the situation in July is dominant. All those who are in favor of such a solution agree that monetary policy works with a long lagbefore it actually affects the economy.

Since the last meeting, which ended on May 3, the market valuation of what the Fed will do has changed slightly. Initially, the market assumed that interest rates have reached their peak and the first cut in the cost of money will take place in September. At the moment there is 30 percent. chances of seeing 25 bps traffic. Discounts are still "in the game" but not to the extent they were a few weeks ago.

Yesterday in the evening there was no major reaction to the dollar. USD appreciation this morning continues and fits in a medium-term trend. The major currency pair hit new local lows around 1,0720 today, marking its lowest level since March.

Until the next FOMC meeting we will get a series of data for May. The US spending report will be released tomorrow. The market will pay particular attention to the Fed's preferred measure of inflation - PCE core. Forecasts indicate stabilization at the level of 4,6 percent. Every year. Next week it is NFP report. The CPI index will be released in less than 3 weeks. By now, we will certainly have a solution to the US debt ceiling.

Source: Łukasz Zembik, OANDA TMS Brokers