FOMC Minutes to Signal Fed Policy Shift?

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There is increased market chatter that the release of the FOMC’s minutes for their July meeting might set the ground for future policy changes.

The results of the meeting were uneventful. However, there is speculation that the members discussed a series of potential measures that could be implemented as early as the next meeting.

Since the last policy decision, members have hinted during their speeches that there is still ongoing debate over what to do now that the economy is in what appears to be recovery mode.

Analysts and traders are going to want to know what members discussed, and what their views are on the policies,. That way, the can gauge what we might expect during the September 15-16 meeting.

The Trajectory

Following their last meeting, Chairman Powell was extra cautious about the outlook.

However, we have to remember that at the time, COVID cases were still on the rise. States were still looking to slow or reverse economic reopening.

Since then, the virus numbers have improved, and corporate earnings reports for the second quarter have come in above initially pessimistic estimates.

The FOMC did note at the time that fast indicators showed that the economy was recovering. That likely colored the debate, as the focus turned to guidance.

Most analysts expect the FOMC to lay the groundwork for a policy change long in advance to actually announcing it. And that is why they expect to see new policy discussion in the minutes.

We are also expecting the Fed to complete its strategic review by September. This will provide the information they need for any policy tweaks.

What’s Up for Discussion?

Firming Guidance

Basically, the Fed is still communicating that they will do “whatever it takes” to right the economy. And of course, that is quite vague.

The expectation is that the FOMC discussed a policy, and would communicate a more definite policy path, such as balance sheet and interest rate target.

Balance Sheet Limits

Under the current “QE infinity” there is no limit to how much the Fed could buy.

One of the ways to provide guidance without giving a specific amount of bond purchases, would be to “cap” the size of the balance sheet expansion.

Flexible Average Inflation Target

This would mean that the Fed would allow inflation to rise above the 2% target without raising rates.

The argument is to “compensate” for the periods when the inflation rate has been below target by allowing it to go above the target for an equivalent period.

All of these measures are meant to convey to the market that interest rates are going to say low for an extended period of time. Like they did after the last recession.

In general, we’d expect these conditions to support the stock market and weaken the dollar.

However, the market already priced in an expectation of some degree of extended low interest rates. What we don’t know is what’s the mechanism that the FOMC is going to choose. Or when it’s going to be implemented.

In the meantime, the evolution of COVID cases and job numbers is likely to be the prime drivers of the dollar and stock markets.

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