When it comes to central bank policymaking, the policy meeting minutes published subsequently are often as important as the interest rate announcement itself. The minutes reveal the substance of the debate and discussion in arriving at the outcome, and how the members of the committee voted.

Eagerly anticipated in the light of December’s unanimous decision by the US Federal Reserve to keep interest rates on hold again, but in a change of tenor strongly hinting that rates would be lower by the end of 2024, the minutes of that meeting were expected to reveal a sea-change in the Fed’s economic outlook. The reality was far less a sea-change than a distinctly damp squib. It was a masterclass in qualification and obfuscation. The summary can effectively be distilled down to: ‘we’re hoping the economy is slowing and that wages are moderating: the indicators are gradually pointing the right way but there is great uncertainty. Inflation appears to be falling towards 2% but we’re not sure whether that is sustainable. On balance we think interest rates are likely to be lower by the end of 2024 than today, but they might be the same or possibly higher’. There you have it: whatever the actual outcome, the Fed can say ‘we told you so.’ Much of the committee’s discussion was about the significant fall in bond yields in the fourth quarter and what markets were implying about future inflation trajectories and interest rates to match: perhaps useful context for the policy wonks but hardly value-added material for investors to be told what they themselves already think.

But there were nuggets of useful insight. One was the Fed’s quantification of the changing shape of the yield curve. “Models, on average, suggested that about two-thirds of the decline in longer-term yields on Treasury securities over the period (i.e. between the November and December policy meetings) was attributable to a reduction in term premiums and about one-third to a decline in expectations for the policy rate”. A conventional yield ‘curve’ is a line which rises from bottom left to top right on the graph, on the basis that an investor in a fixed income bond requires less of a return for an investment with a very short time horizon (i.e. he/she can see what is more-or-less in front of their nose) than one with a long duration where the predictability of the outcome diminishes as the uncertainty increases over time. In lay terms, what the Fed was saying here was that despite that natural uncertainty associated with duration, on a ratio of 2:1 investors were more at ease with the associated risks of having their money tied up for a long period than being preoccupied with the underlying interest rate policy itself (this is on the basis that the long-term assumption is that inflation will be reasonably stable in line with the central banks’ mandated target of 2%, therefore any volatility in bond yields either side of the mean is the implied appetite for taking or avoiding risk over that period).

As we observed in these columns before Christmas when bond yields were tumbling (and prices were heading as equally rapidly upwards), as well as pragmatic analysis of the economic outlook, for investors there was a powerful behavioural factor at work: backed by reported economic data working in their favour, it was the opportunity to recoup some of the significant losses incurred in 2022 and through to mid-October 2023, and those opportunities were greater among bonds with longer duration and higher natural volatility. The implicit warning is that what happened late last year in terms of market behaviour cannot be seen as a permanent state of affairs. It seems obvious that polarised opinions separating markets from policy are unsustainable: both cannot simultaneously be enduringly correct.