Fed Minutes send bond yields higher

The Fed minutes showed that policymakers were divided and that the hawks will still want to deliver more tightening.  Fed Officials are concerned a tight labor market will make inflation tight throughout the rest of the year.  If inflation remains persistent, that could be a gamechanger for inflation expectations.  Wall Street was getting comfortable with higher for a little bit longer, but they are not ready to price in more than a half-point in rate hikes.  In order to conquer inflation the Fed seems set on forecasting a mild recession, which is very much different than Powell’s slower growth call.

In the end, the fate of these Fed policy decisions will depend on the data and right now both the labor market and inflation readings are expected to soften over the next week.  Friday’s NFP report is expected to show job growth cooled from 339,000 to 225,000, while the unemployment rate ticks lower to 3.6%.  The June inflation report is going to show the base effects help the disinflation process as the headline year over year reading falls from 4.0% to 3.0%.  Some analysts are making the case for a 2.8% reading, which seems relatively close to the Fed’s target.  The problem for the Fed is that inflation will likely rise over the coming months.

The dollar will play tug-of-war with the majors as the risk of more Fed tightening is debated, while the Europeans struggle to bring inflation down.

Fed’s Williams spoke after the close and his comments support the case for more rate hikes.  Williams noted that the data supports more action and that the Fed’s work is not done.

Fed rate hike expectations have edged a little higher for the July 26th meeting, but the peak rate remains steady. The yield on the 10-year Treasury yield rose 7.7 bps to 3.932%.

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