The Federal Reserve released the minutes of their last Open Market Committee meeting at 2:00 p.m. on Wednesday, the afternoon before Thanksgiving. There are a few days on the calendar when liquidity is razor thin and Thanksgiving eve is one of them. The minutes were particularly anticipated as several Fed speakers had recently hinted at reducing the magnitude of the rate hikes going forward. That suspicion was affirmed in the “Participants View” section. The exact quote was “…a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The key words in the quote were “substantial majority.” Remember, committee votes do not need to be unanimous; a simple majority is required, and a substantial majority tells me that they have that. We interpret that statement as the Fed communicating that the December hike will not be 75-basis points, with a 50-basis point hike more likely. The minutes also acknowledged that rate hikes impact the economy with a lag, and they are starting to see evidence of slowing. But any hint of policy action in the New Year was avoided entirely.

Finally, a downward bias to the Consumer Price Index! That’s not to say that prices are contracting. In fact, taking it at face value, the inflation numbers are still too high. But the rate of increase is falling, which is welcome news for consumers. Core CPI, the measure that excludes food and energy, rose 6.3% year-over-year, falling from a year-over-year increase of 6.6% last month. On a month-over-month basis the measure rose 0.3%, down from 0.6% last month. That’s a welcome improvement and comes just in time for the Fed.

The Fed’s well publicized “leak” hinting that the Central Bank would raise the Fed Funds rate by 75 basis points this week, but that another hike of equal magnitude in December meeting was not a certainty proved at least partially correct. The committee did raise rates by 75 basis points and, with it, offered a new sentence to the statement: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy…” It was a written acknowledgment that the committee realizes that they have already tightening aggressively and, importantly, policy change works with a lag. However, Chairman Powell’s tone 30 minutes later, at the post-meeting press conference, was decidedly hawkish. We weren’t the only managers to be fooled by the head fake. Bond traders immediately took rates higher. May 2023 Fed Fund futures had rallied to 4.805% on the day of the “leak,” but have since reversed and are closing out the week at 5.12%. Similarly, the 2-year note which traded down to recent low of 4.30% reversed violently and are closing out the week at roughly 4.71%, the high for the year.

A Wall Street Journal story released this morning suggested the Fed would raise rates by 75 basis points at the November FOMC meeting but would then evaluate the need and magnitude of a December rate hike. The market had been anticipating 75 basis point hike at each of the meetings. As we’ve seen in the past, most notably in June when the Fed leaked that they intended to raise rates by 75 basis points, the Fed will leak their intentions in an effort to prepare the market for a change. Whether it was a deliberate signal or cover for St Louis Fed President Bullard’s ethical gaffe, the market heard it loud and clear. The two-year note fell 14 basis points on the day as did Fed Fund futures. The peak in Fed Fund futures continues to be May 2023.