When the Federal Reserve met earlier this month, officials maintained that additional rate hikes would be required to bring inflation down to their 2% objective. Still, nearly all favoured a slowing in the pace of rate hikes, as shown in the minutes from the January 31-February 1 meeting.
Apart from a knee-jerk reaction to some comments in the minutes, financial markets have already priced in the Fed policymakers' outlook.
The Fed minutes said policymakers agreed rates would need to move higher but that switching to smaller hikes would let them calibrate more closely with incoming data.
Indeed, the meeting's minutes revealed that "nearly all" officials thought raising interest rates by 25 basis points was reasonable, while "a few" favoured a larger 50 basis-point increase.
That language suggests a compromise between officials concerned about a slowing economy and those convinced that inflation would prove persistent.
"Outdated" Minutes vs US Data
But since the meeting earlier this month, solid economic data have shown how resilient the US economy is, which has already increased concerns about a prolonged rate tightening cycle.
Moustapha Mounah, a portfolio manager at James Investments in Dayton, Ohio, told Reuters, "the minutes are a little bit outdated because of the data that came out after the Fed discussion, and it's not as important as people think."
Mounah added, "the bond market has already priced in more rate hikes, but the stock market hasn't repriced to reflect all of the movement in the rates."
James Bullard, president of the St. Louis Fed, said on Wednesday that a Fed policy rate in the range of 5.25% to 5.5% would be sufficient to drive inflation towards the central bank's 2% target. Bullard is a non-voting member of the rate-setting committee this year.
Thomas Hayes, chairman at Great Hill Capital in New York, said, "if the most hawkish guy, who is a non-voting member, is at 75 basis points of additional hikes, then maybe the consensus is 50 basis points, and that is a little lower than the market."
The US Treasury yield curve, which is the difference between the yields on two- and 10-year Treasury notes and a top indicator of economic expectations, is highly inverted at minus 77.90 basis points, underscoring an imminent recession risk.
Michael Gapen, head of US economics at Bank of America Securities, said the world's largest economy exited 2022 "with more momentum in the labour market and risks around inflation" than Fed officials likely expected.
"We need to see broad-based disinflation, and we didn't get that in recent data," he added.
Before the Fed's latest meeting, money markets had predicted interest rate cuts in the second half of 2023.
Since then, though, traders have reduced their bets on the probability that the Fed will change direction and begin lowering rates before the end of the year.
With January's positive employment and inflation numbers, Kathy Bostjancic, chief economist at Nationwide Life Insurance, said she raised her projection for the peak federal funds rate to a range of 5.25% to 5.5%.
The consumer price index, excluding food and energy prices, grew 5.6% from the previous year while payrolls expanded by 517,000.
Following the release of the minutes, the fed fund futures indicated 25 basis points rate hikes at the meetings in March, May, and June and the interest rate to peak at 5.36%.
What Does That Mean for Digital Assets?
After the Fed minutes, trading in Bitcoin and Ethereum signalled strength across the over US$1 trillion broader crypto market.
That suggests, barring bouts of volatility, the upward momentum in cryptocurrencies and related assets is expected to continue.
"Notwithstanding the Fed minutes' aggressive tone, it is increasingly obvious to everyone that we are now much closer to the "home run" for digital assets, a trend seen since the start of the year," said a Chief Investment Officer at a large US asset management firm in Boston.
"The momentum in crypto markets was built around expectations that digital currencies will be the unavoidable form of money in the future. Investors are expected to hold on to that view and look beyond short-term inflation and interest rate views," the CIO added.
Holding digital, borderless, decentralised currencies makes sense in the current increasingly technologically advanced, globally integrated world.
Moreover, adoption and demand are rising while the supply is steadily declining.