The Federal Reserve has just released the minutes of its April meeting and they are definitely more hawkish than expected.

Lorenzo Ippoliti, Milán

The message that the FED wants to convey to the market is very clear: a June rate increase is still on the table if economic data releases continue to be on the strong side.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June”

As far as global risks are concerned, Fed participants see them somewhat receding:

“Participants generally agreed that the risks to the economic outlook posed by global economic and financial developments had receded over the intermeeting period”

Several Fed presidents also expressed the view that the market was underestimating the chances of a June rate hike:

“Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments”

Markets need a clear message from the FED

Fed funds are now pricing a 42% probability of a rate hike in June up from 19% before the release and just 4% last Monday. The main beneficiary of this increased perceived probability of an interest rate rise is the dollar that is now breaking the 110 psychological upside barrier against yen and is approaching 1.12 against Euro. Stocks are mostly unchanged on the day and it will be very important to see if they can hold these levels as renewed stock market weakness could scare the Fed once again like in January. Emerging market stocks and currencies will feel some pressure. We can also expect oil and gold to retrace some of the recent rally.

All in all we think that this development is positive. This market needs clarity otherwise it will remain hostage of what UBS Ceo Sergio Ermotti called  “paralyzing volatility”, meaning a market characterized by violent swings on very low volumes as most of the market participants prefer to stay out. Contradicting messages by central bankers are one of the main causes of market confusion.
The Fed raised rates in December for the first time in December after almost a decade. They have been on hold since then due to global financial market fragility.

Lorenzo Ippoliti is a proprietary trader with 20 years of experience mainly in Forex and credit markets. He has worked for some of the major banks in Italy. Lorenzo holds an MBA for the SDA Bocconi School of Management.

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