FOMC Minutes Still Show Concern About Core Inflation

Today wasn’t the most exciting of markets, but there was some price action nonetheless, which initially went against the USD in the Asian and European sessions, but then the USD turned positive after the ADP employment and unemployment claims numbers which showed that the labour sector remains upbeat in the US.

In the European session, we witnessed stronger revisions to the Eurozone and UK services PMI numbers, which helped to keep the Euro and GBP stable, but they turned lower in the US session. Meanwhile, French and German inflation figures are somewhat higher in December, but this is attributable in part to increasing energy prices.

The USD began the day on the back foot as we mentioned, before becoming more divided as risk appetite showed some modest signs during the session. European equities were modestly higher before quickly trimming gains, and are now only marginally ahead as we move into US trade. However, today markets were following the post-FOMC minutes action which were published yesterday, until the data was released.

Comments from the FOMC minutes of the Dec 12-13 meeting

1. Policy Rate Likely Near Its Peak:
   • Participants in the discussion generally believe that the policy rate is likely near its peak, suggesting that the central bank may not raise interest rates significantly in the near future.
2. Significance of Adding ‘Any’ to the Statement:
   • Members interpreted the addition of the word ‘any’ to the statement as an indication that interest rates are likely near their peak.
3. Uncertainty about Restrictive Policy Duration:
   • Some participants expressed uncertainty about how long a restrictive policy stance would need to be maintained. They highlighted potential downside risks to the economy associated with maintaining an overly restrictive stance.
4. Uneven Progress on Inflation:
   • Participants observed that progress on inflation has been uneven across components. While there may have been progress in some areas, core services prices were noted to be still rising at an elevated pace.
5. Potential for Longer Maintenance of Current Policy Rate:
   • Several participants suggested that circumstances might warrant keeping the policy rate at its current level for a longer duration than initially anticipated. This could imply a cautious approach to future rate hikes.
6. Decline in Use of Overnight Reverse Repo Facility:
   • Some participants noted a decline in the use of the overnight reverse repo facility. This decline was interpreted as reflecting portfolio shifts by money market funds, indicating changes in market dynamics.

The market reaction to the FOMC minutes was muted, but they’re three weeks old and FED officials have had numerous opportunities to talk since then. However, the comment about core services stands out as the most crucial one, and the one that Fed policymakers are keeping an eye on.