FOMC minutes were much Hawkish than expectations!
According to the published minutes of the meeting back in March, FOMC members supported a reduction of up to $95 billion of its owned assets per month ($60 billion in Treasuries and $35 billion in MBS). It can continue as long as it needs until the upper limit of the scale reduction is reached. That pace is faster than what we saw back in 2017-2019 when the largest drawdown was $50 billion per month, however, we should compare it with the buying pace last year, when it was about $120 billion per month.
In addition, the minutes of the meeting also confirmed that most probably, members will be supporting the rate hikes by 50 basis points in the May meeting. On the other hand, considering economic and financial developments, especially with the ongoing conflict between the Russians and Ukrainian, such a larger rate hike with a fast balance-sheet reduction can put the US economy at a large scale risk. According to the meeting dot plot, attendees also expect a neutral rate of interest of around 2.4%.
After the FOMC minutes were published, market expectations for another rate hike in 2022 surged to nine (up from six previously), with a more than 80% chance of a 50 basis point hike in the next meeting (May3-4).
Overall, considering the higher risks on the market, the minutes of this meeting were more hawkish than market estimates. However, there are still some analysts and investors that believe it was not a surprise, and the central bank must be much stricter even with the faster rate hike. Although all mentioned comments were just discussions and not decision! And even if it becomes to the level of decision, does not mean that cannot change. FED chair Powell repeatedly mentioned before also that in any stage, if they feel policy needs to be changed and go towards new policies, FED is ready to change and adopt the policies.
As a market reaction, the US 10-year treasury yields increased to the strongest level since April 2019 at 2.66% before retreating below 2.6% early Thursday. The US dollar index also increased, all way up towards 99.77, the highest level in nearly two years. The focus will be on the US weekly Initial Jobless Claims data and speeches of FOMC policymakers.
From the technical point of view, the first and very strong support sits at 98.95, and as long as it is trading above this level, bulls have much more strength to go higher. First resistance, also sitting at last night's high at 99.77, and breathing above this level will send the index above 101 in the next weeks.
