Rates Spark: Fed Minutes Sustain Hawkish Stance Amid Inflation Concerns

Rates Spark: ISM is a dancer

It's very much glass half full for inflation risks, and the latest Fed minutes voice concern that has been echoed by the ECB (and BoE). This plus supply pressure and rising deficits is placing ongoing upward pressure on market rates. Despite survey evidence pointing down, we think pressure remains for even higher market rates.

 

Fed minutes sounds suitably hawkish – in tune with the market mood of late

Fed minutes are sustaining the hawkish tilt that has been dominating policy discussion of late. The Fed paused in June, but some participants would have preferred a hike. There was acknowledgement of ongoing firm GDP growth and high inflation, with core inflation in particular showing no tendency to show any material fall this year so far. The balance is one of a hawkish Fed, with some seeing the possibility of avoiding a material downturn. Staff still see a mild recession ahead.

The Fed also noted that credit remains available to highly rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Apart from obviously higher borrowing costs, the Fed also notes a tightening in lending standards in the commercial real estate space. There was also a tightening in credit conditions for lower rated borrowers in the residential mortgage market. But overall vulnerabilities to funding risks are deemed moderate by the Fed.