Fed's Hawk-Dove Divide Widens Amid Rate Hike Expectations

Wednesday’s release of the FOMC June 14 meeting minutes showed a clear agreement for continued interest rate hikes next year.

The consensus echoes Fed Chair Jerome Powell's stance, who has been pushing for two additional increases in 2023. Despite the strength of the economy and the tightened labor market prompting some members to back an immediate 25bps hike, the majority decided to hold the federal funds rate target range steady at 5%-5.25%. Read more on the Fed Minutes here.

Economists were divided in their interpretation of the Fed’s minutes.

Jeffrey Roach, Chief Economist at LPL Financial noted disunity among the board members, with some foreseeing a mild recession later this year due to tightening credit conditions. He anticipates a likely rate increase in July, with the Fed keeping an eye on potential signs of a loosening labor market.

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Quincy Krosby, Chief Global Strategist for LPL emphasized the divergence among the hawks and doves regarding monetary policy. The former group sees a necessity for continued rate hikes due to persistent inflation, while the latter prefers to wait and observe the effects of previous hikes on the broader economy.

AXS Investments CEO Greg Bassuk told CNBC, “That continued aggressive rhetoric or messaging around their plans for the coming months… got investors a lot more skittish.”

A more contrarian stance came from Michael James, managing director of equity trading at Wedbush Securities, “If we continue to see a cooling of inflation, there may not be any further rate hikes,” he told Reuters.

Traders’ 25-bps rate hike expectations for July remained steady at 88.7%.

Post minutes’ release, stocks reacted subtly, with the SPDR S&P 500 ETF SPY Trust ebbing 0.3% while the Invesco QQQ Trust QQQ erased session gains.

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