How have financial markets reacted to latest FOMC minutes?

On Wednesday, the Fed issued the minutes of its last meeting held on April 30 and May 1, which sheds light on monetary policy trends and overall economic conditions. The minutes also answer important questions related to the challenges facing financial markets in America and the world. Let’s have a look, , in this report, at the performance of key financial assets following the FOMC minutes that was, in general, hawkish:

The minutes revealed that “several policymakers expressed their willingness to return to quantitative tightening in the event that risks of rising inflation persist in one way or another, as long as this measure is appropriate.” The meeting participants also saw that it was appropriate in May to “keep the interest rate at the current levels in the range of 5.25% – 5.50%, the highest in 23 years”. The decision was supported by the data that has been made available since the previous meeting, which highlighted the continued strong economic growth.” In general, the minutes seem to indicate reservation by Fed members regarding the direction of monetary policy, and this could very well affect the performance of financial assets in the coming months, among other key factors.

Less Confidence

FOMC members expressed optimism about the future growth of the US economy, despite the expectations echoed by some of them that growth may show modest performance in the coming period. The minutes of the Fed’s meeting added: “It will take longer than expected until we have greater confidence in the decline in inflation”, emphasizing that many of the committee members’ words reflected a state of uncertainty regarding the current amount of monetary policy tightening.

The FOMC minutes indicated that the participants in the last meeting supported the message that was often repeated in previous meetings, which includes that “the future course of monetary policy will depend to a large extent on the data that appears in the coming period, the developments that emerge in the future outlook for the economy, and the extent of the balance regarding the risks involved in the current economic landscape.

Almost all meeting participants also supported the decision to reduce the US Treasuries and mortgage-backed securities that are resold or allowed to reach maturity.

FOMC minutes also indicated that the meeting participants believe that the recent data did not succeed in increasing confidence that there is progress in combating inflation and achieving the central bank’s target of 2.00%.

FOMC Minutes Versus Latest Statements by Fed officials:

The content of the minutes of the monetary policy meeting in May is consistent with the statements of Federal Reserve officials, which recently raised concerns about the lack of progress in confronting inflation. Despite signs indicating a slowdown in inflation, the comments of Federal Reserve officials were more cautious about when to cut interest rates. Traders expect more indications about the path of interest rates in the future.

US Dollar Index (DXY)

Despite the uncertainty, the US Dollar Index (DXY) rose to multi-day highs and was trading near the 105.00 barrier supported by language that came more inclined to tighten monetary policy in the long term. The Dollar Index was seen around 104.95, versus previous closing at 104.66. The index registered daily low at 104.56 points, compared to daily high of 104.97 points.

Gold’s Performance:

Gold prices were also affected by the minutes, as fears of continued inflation persist, with gold benefiting as a reliable safe haven for investors’ money under these circumstances, achieving gains amounting to 0.11% and trading at 2,381.90 per ounce.

Stock Markets:

US stocks fell after the release of the minutes, as it indicated that the hoped-for progress towards the target level had not been made in recent months with regard to lower inflation, and this may be a warning of further volatility in the markets, as US stocks fell from record levels on Wednesday after the minutes of the meeting for May highlighted Highlighting officials’ concerns about inflation as investors awaited AI leader Nvidia’s (NVDA) quarterly results, which beat analysts’ expectations.

The Dow Jones Industrial Average fell to 38,761 points after losses of about 200 points, or 0.6%. The Standard & Poor’s 500 also fell to 5,307 points, after falling by about 15 points, or 0.3% and Nasdaq fell to 16,801 points after losses of about 32 points, or 0.2%.

Oil prices:

Oil prices fell by 1% after the release of the minutes, as investors expect the Federal Reserve to keep interest rates high for a longer period due to continued inflation, which affects the levels of demand for oil. US West Texas Intermediate crude was traded at $76.975 per barrel, a decrease of 0.11%.

US Treasury Bonds:

Rising yields on Treasury bonds and the continued recovery of the dollar provided additional support for the USD/JPY pair, which is close to the top zone for three weeks.

What are the future interest expectations?

If inflation continues to rise, this may be an incentive to raise interest rates, or at least fix them at the monetary policy meeting next June, which is considered a postponement of many hopes that were pinned on the possibilities and bets of reducing interest rates 4 times this year, and the Federal Reserve is monitoring Closely monitor inflation indicators such as the Consumer Price Index, CPI and Producer Price Index, PPI, as well as the Personal Consumption Expenditures Price Index, PCE.

Investors and analysts should continue to monitor the statements of Federal Reserve Board members for signals about the direction of monetary policy. Investors must be prepared to deal with interest rate fluctuations and future economic challenges as well as opportunities.