The problem with the Fed fighting inflation is that it needs to tackle growth sharply in order to do it. Investors have been wanting to know how much pain is the Fed willing to inflict on the US economy to bring down inflation. In the last Fed meeting, the Fed recognised that growth was slowing in the US. See here for that summary of the last Fed meeting. So, these minutes were always going to be viewed very intently to see any more hints on the Fed’s actions.

The minutes show a Fed ready to slow the pace of hikes

All of the participants saw a 75bps hike as appropriate, but no one wanted a 100 bps hike. The key line that allowed stocks to pause their falls on Wednesday night (before resuming them on Thurs am) was that, ‘at some point in time it would be appropriate to slow the pace of increase’. You can read the full minutes here.

The path of the Fed

Markets took a breather from the recent sell-off on these minutes in relief that the Fed would be willing to pause. However, the Fed also recognised that there was little evidence inflation pressures were subsiding. Do though note the weak CPI print that took place since these minutes. So, the key point is that the Fed will still continue to hike rates if inflation dictates that they need to. Remember the influence of Volcker who took interest rates up to 20%! This drove unemployment up to 10% and some civil unrest. However, Volcker then prompted a new era of growth and low inflation. The key thing to learn from the 1980s is that if you go soft on inflation it only gets worse. You have to go hard. See here for a historical account of what happened from Paul Volcker himself in a fascinating interview with Ray Dalio.

The takeaway

The main takeaway is that inflation will remain a very important metric going forward. If inflation prints surprise to the downside look for short-term USDJPY selling as yields should also fall. Surprise to the upside then look for potential short-term USDJP buying as yields should also rise.