The release of the FOMC minutes on Wednesday could be the highlight for the markets this week. That’s because it will give some detailed insight into how the Fed is thinking about rates. Unless Fed Chair Jerome Powell delivers a surprise at the Jackson Hole Symposium on the weekend, the minutes could set the tone for the markets going forward.
Several issues make these minutes particularly important, despite the Fed not taking action at the last meeting. The first is that there are fluctuating odds about what to expect at the September meeting. Markets are pricing in a majority chance of a rate cut, but the uncertainty is enough to move the dollar.
The Main Points Traders Are Looking At
There is growing division within the Fed as well as external pressure around how to establish rate policy. At the last meeting, there were two dissenters to the vote, which is an infrequent circumstance. The last time there were this many dissenting votes was 1993. Those dissenters, of course, voted to ease. US President Donald Trump has been pressuring the Fed to cut rates, and will appoint a new member to the FOMC who will likely also be in favour of cutting rates. Traders will likely want to see how the discussion went to gauge the level of dovishness among members.
The other aspect is that the Fed’s statement following the meeting relied on a solid jobs market to justify keeping rates unchanged. Just two days later, there was a major shakeup when NFP disappointed. But also, the Bureau of Labor Statistics (BLS) had to correct two months of jobs numbers, cutting them drastically. This left the Fed wrong-footed and brought back memories of what happened almost exactly a year ago. That is when the Fed started its easing cycle with a 50bps cut after the BLS also revised downward its jobs numbers.
So, Definitely a Cut?
FOMC members have the opportunity to ‘revise’ their remarks in the minutes. Given how soon after the jobs data came out, they might revise their statements to reflect the outlook better. Following the data, several FOMC members expressed more dovish views than they had previously. This means that the minutes could convey a more dovish tone than the statement or Powell’s presser did a couple of weeks ago.
Markets are now pricing in an 85% chance of a rate cut at the next meeting. Where things are more uncertain is October, when markets see a 43% chance of a second cut. This is important because there are only three more meetings this year. To get three cuts (for 75bps in total), there would have to be a cut at every meeting. Raising the chances of a cut in October would likely affect the dollar.
How the Market Could React
Usually, rate cuts weigh on the currency. That’s because they often translate into lower interest rates, resulting in lower returns on investments in that currency. But the dollar has been depreciating this year, not from interest rates, but from expectations of a slower economy. More cuts from the Fed would presumably help the economy, which could mean the dollar firms up if the market prices in more easing.
