FOMC Minutes: The Fed’s dilemma; Turkish lira is a time bomb

FOMC Minutes: The Fed’s dilemma; Turkish lira is a time bomb [Video]

FOMC Minutes: The Fed’s dilemma

(Giles Coghlan LLB, Lth, MA – HYCM)

The problem with the Fed fighting inflation is that it needs to tackle growth sharply in order to do it. Investors have been wanting to know how much pain is the Fed willing to inflict on the US economy to bring down inflation. In the last Fed meeting, the Fed recognised that growth was slowing in the US. See here for that summary of the last Fed meeting. So, these minutes were always going to be viewed very intently to see any more hints on the Fed’s actions.

The minutes show a Fed ready to slow the pace of hikes

All of the participants saw a 75bps hike as appropriate, but no one wanted a 100 bps hike. The key line that allowed stocks to pause their falls on Wednesday night (before resuming them on Thurs am) was that, ‘at some point in time it would be appropriate to slow the pace of increase’.

The path of the Fed

Markets took a breather from the recent sell-off on these minutes in relief that the Fed would be willing to pause. However, the Fed also recognised that there was little evidence inflation pressures were subsiding. Do though note the weak CPI print that took place since these minutes. So, the key point is that the Fed will still continue to hike rates if inflation dictates that they need to. Remember the influence of Volcker who took interest rates up to 20%! This drove unemployment up to 10% and some civil unrest. However, Volcker then prompted a new era of growth and low inflation. The key thing to learn from the 1980s is that if you go soft on inflation it only gets worse. You have to go hard.

The takeaway

The main takeaway is that inflation will remain a very important metric going forward. If inflation prints surprise to the downside look for short-term USDJPY selling as yields should also fall. Surprise to the upside then look for potential short-term USDJP buying as yields should also rise.

Turkish lira is a time bomb [Video]

(Ipek Ozkardeskaya – Swissquote Bank Ltd)

The Norwegian central bank raised the interest rates by 50bp yesterday and said that there will be a similar move in September, to tackle the soaring inflation in Norway. The Philippines hiked by 50bp as well, to cool inflation. The Federal Reserve (Fed) minutes released this Wednesday showed that the US will continue raising the rates and tightening the monetary conditions to bring inflation back toward the 2% level in the US. The European Central Bank (ECB) board member Isabel Schnabel said that the eurozone inflation outlook has failed to improve since the rate hike in July and that she will favour another large interest rate hike next month, even as recession risks harden. But Turkey cut its rate by 100bp yesterday, although consumer prices rose 80% year-to-date, and near 180% since a year.

The USDTRY jumped past the 18, although the selloff remained under controlled because of central bank intervention.

The US dollar index gained, the euro, sterling and yen weakened.

Gold extended losses to $1750 on the back of a stronger US dollar, while crude oil rallied near 4% yesterday on 7-mio decline in US crude inventories last week.

US stock indices closed slightly high on better-than-expected retailer earnings, and encouraging economic data, while the Bed Bath and Beyond dived 20% as Ryan Cohen exited his position.

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