Fed Minutes Reveal Split on Terminal Rate, Hawkish Tilt Dominates
First-Order — What Happened
FOMC meeting minutes show 7-5 split on terminal rate path. Hawkish majority favors "higher for longer" stance citing persistent services inflation. Dissenting members warn of recession risk.
Second-Order — Chain Reaction
Long-duration bonds sell off (yields rise) → Yield curve steepens → Banks profit from wider spread BUT credit tightening accelerates → Small-cap equities under pressure → Dollar strengthens → Commodities (ex-gold) weaken. Defensive rotation into utilities and consumer staples.
Next-Step Forecast
What to Watch
Key levels: 10Y yield breaking 4.5% triggers further equity de-risking. Monitor: (1) Credit spreads (HY vs IG) for stress signals, (2) Small-cap (IWM) relative to large-cap (SPY), (3) Unemployment claims for recession confirmation. Reduce duration risk, increase cash allocation.