In my opinion, this was the most important statement in the minutes from the Federal Reserve’s June meeting released today: Fed officials “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis.”
Nothing guaranteed but the Jerome Powell Fed, commonly regarded on Wall Street as having no stomach for a recession, was signaling that it would continue to increase interest rates until it brought inflation under control even at the cost of a recession.
That’s important because the current market consensus is predicated on the Fed quickly backing off on interest rate increases face of a recession. Recession soon, perhaps this quarter or the next, but then interest rate cuts in early 2023, the current story goes.
A Fed that kept raising rates in the face of a recession would go upset that consensus view.
Two-year Treasury yields, which are very sensitive to Fed interest rate policy, moved higher after the afternoon release of the minutes. The yield finished the day at 2.96%. Yesterday, July 5, the yield on the 2-year Treasury closed at 2.84%.
Odds for a 75-basis-point interest rate increase at the Fed’s July 27 meeting rose to 90.9% on the CME FedWatch Tool from 83.8% on July 5. A 75-basis-point increase would take the Fed’s short-term interest rate benchmark to a range of 2.25% to 2.50%.