FOMC Minutes Awaited As Traders Digest Data, Earnings

With major events ahead of the markets, the focus would shift to global markets and earnings for cues. On the macro front, traders are digesting Monday’s IIP data, both CPI Inflation and WPI inflation are also being analyzed along with the latest earnings reports.

After the reaction to US’s hot inflation, investors globally will be focused on gaining a clearer understanding of the Fed’s action, as the minutes of the most recent FOMC meeting are set to be released.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. For supporting the said goals, FOMC decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation above 2 percent and a strong labour market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.

The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. FOMC would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

FOMC’s assessments will take into account a wide range of ten available data, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The FOMC Meeting Minutes tend to counter the tone set in the meeting. Contrary to the original hawkish message, doves may have the upper hand in the document. Lower rate hike expectations may weigh on the dollar, boosted by strong US data. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage backed securities by at least $10 billion per month.

While protocols from the Federal Reserve’s meeting minutes are tailored to send markets a message, they also have a clear record in surprising markets with a tone that is different from the messages conveyed at the post rate decision stance.

In September, November and December 2021, Fed Chair Jerome Powell was relatively dovish in official testimonies, public appearances, and press conferences referred to earlier. Hawks in the central bank made themselves heard in various interviews but seemed to fade to the shadows around the Fed’s decisions.

However, those hike-happy officials leaped back to the forefront in the meeting minutes, supporting a faster pace of rate increases a quicker beginning to tapering bond buys – or a faster end to that process. This time, the same logic may apply, but in favor of the doves.

The upcoming release refers to the January 26 2022 meeting, in which Powell expressed surprisingly hawkish views. He refused to rule out raising rates by a double dose of 50 bps in March, left the door open to hiking borrowing costs at every meeting, and also allowed for a fast sell-off of bonds the bank accumulated.

Since then, data has supported his views. The economy gained 467,000 jobs in January, triple the early estimates and inflation hit yet another 40-year peak at 7.5% YoY last month.

That has been enough to convince markets that a double-dose rate hike has better chances than a standard 25 bps move in March. Here is what bond markets reflect:

Some policymakers, such as Atlanta Fed President Raphael Bostic, have been playing down the chances of a 50 bps rate move in March. Even St. Louis Fed President James Bullard, at the extreme end of the hawkish spectrum, does not see an initial strong move as a necessity.

That implies markets are overpricing the Fed’s rate hike cycle. The meeting minutes could reflect a calmer stance. Such a more data-dependent approach would push expectations lower and drag the greenback down with it.
Apart from the Fed’s tendency to balance its message in the minutes, the world’s most powerful central bank is also mindful of what happens on Wall Street. While taking the froth out of tech stocks could be seen as a much-needed repricing, a broad bear markets undoubtedly something the Fed would like to avoid. That is another reason to send a soothing message.