Fed May Not Be Done Hiking Interest Rates, Missing The Debt Ceiling Deadline Will Cause Disruptions: FOMC Minutes

The minutes of the May 2-3 FOMC meeting revealed uncertainty about how much more policy tightening may be appropriate, with some FOMC participants  warning that a failure to raise the federal debt limit in a timely manner will threaten significant financial system disruptions and lead to tighter financial conditions.

Key Takeaways From The FOMC Meeting Minutes

• The Committee unanimously decided to increase the federal funds rate by 25 basis points to a target range of 5 to 5.25% in May. The move was highly discounted by the market. 
• Some participants stressed it was crucial that the statement not signal the likelihood of rate cuts this year or rule out further hikes, shifting to a data-dependent approach. 
• The economic forecast prepared by the staff for the May FOMC meeting forecasted a mild recession starting later this year, followed by a modestly paced recovery.
• Fed participants highlighted that inflation continued to be elevated in March and is declining slower than they had expected.
• Concerning the regional bank tensions that arose after the failures of Silicon Valley Bank and Signature Bank, Fed officials believe the U.S. banking system is solid and resilient: "Deposit outflows from small and mid-sized banks largely stopped in late March and April."
• FOMC members anticipate that recent developments in the banking sector could likely result in tighter credit conditions for households and businesses, which would weigh on economic activity, hiring and inflation.
• Market Reactions: Stocks were weaker on Wednesday, with the SPDR S&P 500 ETF Trust SPY losing 0.8% and the Invesco QQQ Trust QQQ down 0.7%. Treasury yields moved higher for the day. The rate-sensitive two-year yield rose by 2 basis points to 4.34%, while the 10-year yield held steady at 3.7%. 
• The dollar was the outperformer of the day among major asset classes, with the Invesco DB USD Index Bullish Fund ETF UUP surging 0.4% for the session. 

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