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Fed: FOMC minutes and yield curve steepening

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Central banks have the minutes of the Fed’s December FOMC meeting today on their radar. As it is remembered; While the Fed doubled the rate of cutting asset purchases at its December 16 meeting, the markets also considered the end of QE as March 2022. The approach that will emerge in today’s minutes will be important in the context of the steepening in the yield curve in the last days, led by the 10- and 30-year yields, and in addition to the Fed future funds highlighting the pricing that the March FOMC meeting may be lively. So, in summary, the facts that we will look at are as follows; “How worried are Fed members about inflation?” and “Can the amount of intervention in the balance sheet expand?”.

 

Let’s take a look at the basic facts that have developed with the assumption that the Fed will not prolong the balance sheet reduction event: It seems that the subject discussed is inflation. In a way, the yield curve has not made serious inflation and tightening pricing so far, but now it seems to have put the growth concerns about the omicron variant into the background. The story that the data will tell us should be evaluated according to the following criteria for the Fed: If the signal is received that inflation will remain high while growth continues, the Fed will not hesitate to increase interest rates. This is important in terms of providing a more comfortable movement area, because the Fed’s most important reservation while increasing real interest rates is to cause a hard landing in the economy. The variant will not be very effective and the relief in the economy compared to the pandemic period will allow the Fed to act more comfortably in terms of a tighter policy ground that will put the inflationary environment under control.

 

US yield curve positioning… The curve consists of US Treasury assets in US dollars. 1-month, 3-month, 6-month and 1-year maturities are the most recently auctioned 4-week, 8-week, 13-week, 26-week and 1-year US Treasury bills. 2-year, 3-year, 5-year, 7-year, 10-year and 20-year maturities are the most recently auctioned US Treasury bonds. The 30-year maturity is the most recently auctioned 30-year US Treasury bond. The curve is updated on each auction day with the validity date of the next market day. Source: Bloomberg, US Department of Treasury

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Considering the Fed’s December statements, it is expected to complete its bond purchases by March 2022. Regarding rate hikes, we anticipate a cumulative 150 basis point rate hike in 2022 and 2023. Although we see the months of May, September and December alive for the three rate hikes we expect in 2022, it is seen that the March FOMC meeting has entered the radar in the pricing of futures funds, although it is very early in theory.

 

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