📝 Minutes Hint Slower Rate Increases And A Pause: BMO

The minutes of the Fed's July policy meeting affirmed that rates haven't stopped rising, but that the peak could come sooner than previously thought. Citing few signs of lessening in underlying inflation pressures, and noting that strength in the labour market casts doubt on the underlying weakness in the economy (or at least GDP), the minutes confirmed that the only question for September is whether the Fed will scale back to 50 bps from consecutive 75-bp hikes. Slower demand is a necessary ingredient in the Fed's cooler inflation recipe. As well, "some" FOMC members believe rates may need to stay at a "sufficiently restrictive level...for some time" to restore price stability, casting some doubt on 2023 rate-cut hopes. The minutes did note that "at some point" it would be appropriate to slow rate increases, which the Treasury market ran with and rallied a bit. Participants also acknowledged the risk of over tightening policy...something they have been reluctant to mention given the all-hands-on-deck approach to fighting inflation and containing inflation expectations. As such, slower rate increases followed by a lengthy pause might be in the cards.

There is still plenty of data between now and the September 20-21 meeting. Assuming both the inflation and growth data land on the lighter side of the ledger, we see the Fed scaling back to 50 bps.

- BMO Capital Markets