Analysis: CBOE

Two o'clock has come and with it we have the minutes from the Fed's Jan 31-Feb 1 policy meeting, one in which the Fed boosted interest rates by 25 basis points.

As we shared in our comments earlier today, the minutes are rather rear view facing given the meeting was held before the January Employment Report and both the January CPI and PPI reports, but as we can tell by the market's about face from earlier this morning, it wasn't happy with what it learned.

Unsurprisingly, the report reiterated what we've been hearing from the Fed: "With inflation still well above the Committee's longer- run goal of 2 percent, participants agreed that inflation was unacceptably high." That comment was followed by Fed Chair Powell noting "...substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path."

Not surprising and certainly not a revelation given the recent appearance at the Economic Club of Washington.

A 50-Basis Point Rate Hike?

The minutes also showed that "a few" participants wanted to raise rates by 50 basis points at the meeting. We'd share with you that typically "a few" in Fedspeak means more than two. The thought process behind that rationale was "a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance."

Again, that was before the recent data we referenced above. Odds are those "few" are more inclined to do more, and they are likely to see their ranks increase. We saw that today with comments today from St. Louis Federal Reserve President James Bullard a more aggressive interest rate hike would give the Fed a better chance to bring down inflation that despite some progress remains high.

This too is something the market has started to contemplate as evidenced by the CME FedWatch Tool now showing a 24% chance of a 50-basis point rate hike following the Fed's March meeting, up from 0% January 20. In the next four weeks, we will receive several pieces of new inflation data as well as employment and wage data.

They will help color in the lines, giving us a clearer picture of the vector and velocity of inflation, and tell us if the labor market remains tight. In turn that will tell us how likely the Fed will step up its efforts on inflation.

In terms of the market, there is little question it got out over its skis in January on the hopes the Fed was nearing the end of its rate hiking. We cautioned members that despite the progress seen in the data at the time, we were still a ways away from the Fed's 2% target. We are now seeing the market rethink the prospects of the Fed having to do even more than, more likely for even longer than the herd was thinking.

That is rippling through the market and as expected, no one was talking rate cuts at the January 31-Febraury 1 FOMC meeting, and, in Fedspeak, that means no one.

Each inflation data point will be a key item for the market, which means we could see market volatility and market swings continue in the coming weeks. We will continue to take a measured approach with the portfolio, looking to be opportunistic when and where it makes sense to do so. The market volatility should be a positive for Action Alerts PLUS holding Cboe Global Markets  (CBOE) shares as investors look to blunt its impact.