Fed Minutes to provide clues on March hold as war-related inflation fears mount

WHITE HOUSE PRESS SEC. LEAVITT: TRUMP DISPATCHING TEAM FOR IRAN-TALKS, LED BY VANCE, TO PAKISTAN ON SATURDAY ... WHITE HOUSE PRESS SEC. LEAVITT: IRAN HAS GIVEN INDICATION THEY WOULD TURN OVER ENRICHED URANIUM ... WH Press Sec. Leavitt: Conversations took place between US and China.

DALY: IMPORTANT THAT FED DOESN'T MOVE AROUND AS MUCH AS NEWS, OR MARKETS, DO Fed's Daly: Question is how long oil will remain elevated, too early to know. FED'S DALY: SO FAR, CONSUMERS ARE STILL SPENDING, BUSINESSES STILL INVESTING. ... Fed's Daly: Too early to know economic consequences of Iran war.

The manager turned first to an overview of broad market developments during the intermeeting period. Earlier in the period, concerns about artificial intelligence (AI) disruptions to certain business models led to declines in policy rate expectations and interest rates and weighed on equity prices. The conflict in the Middle East—which started later in the period—resulted in sharp increases in energy prices, raised questions about the macroeconomic outlook, and caused a notable repricing in several asset classes. Respondents to the Open Market Desk Survey of Market Expectations (Desk survey) viewed the U.S. macroeconomic outlook as little changed, apart from an increase in near-term inflation projections; the manager noted, however, that survey responses came in the early days of the conflict. The manager observed that front-month futures prices for crude oil increased about 50 percent over the period. The significantly smaller rise of the longer-dated futures prices compared with the front-end futures, however, could have indicated expectations that most of the recent increase in oil prices will be relatively short lived. Other market prices were consistent with this interpretation. For example, the one-year inflation swap rate rose nearly 50 basis points over the period, but forward measures of inflation compensation at horizons beyond one year were little changed. The manager then turned to policy rate expectations. The near-term federal funds rate path implied by futures prices shifted higher, on net, over the period, with a rate cut not fully priced in until December. The modal path based on options prices also shifted higher and was consistent with no rate change this year, compared with one 25 basis point cut previously. The distribution of federal funds rate outcomes early next year implied by options prices shifted notably to higher values and became more dispersed; as a result, the probability of rate hikes through that period increased to about 30 percent. By contrast, the median of the modal paths reported in the Desk survey continued to show two 25 basis point rate cuts this year, although survey respondents pushed out the timing of those cuts slightly compared with their previous expectations. The manager noted, however, that market intelligence suggested that some survey respondents appeared to have shifted their expectations in the direction of fewer rate cuts in the days after the survey was conducted. Treasury yields ended the interme *FED: SOME SAW `STRONG CASE' FOR TWO-SIDED LANGUAGE ON RATE PATH ... *FED: MANY SAID INFLATION HIGHER FOR LONGER COULD CALL FOR HIKES ... *FED: MOST SAID PROTRACTED WAR COULD HIT JOBS, WARRANT CUTS ... FED MINUTES: ALMOST ALL PARTICIPANTS SUPPORTED HOLDING RATES AT MARCH MEETING; VIEWED CURRENT POLICY RATE WITHIN PLAUSIBLE LEVEL OF NEUTRAL RATE ...