Markets will be paying extra close attention to the release of the FOMC minutes on Wednesday, given the contentious debate at the time and the fact that it was the last meeting presided over by Jerome Powell. The new Fed Chair will be officially sworn in on Friday, an opportunity for him to deliver remarks on monetary policy and shape market expectations.
Markets are pricing increasing odds that the Fed will have to raise rates before the end of the year. This is a bit at odds with the final statement issued after the last FOMC meeting, and caused some controversy. Three members objected to the statement that implied that the next Fed move on rates would be a cut. It was the highest number of dissenters in decades, highlighting the growing divisions within the Fed as inflation remains above target for the third year in a row.
Counting the Hawks as a Dove Arrives
US President Donald Trump has been pushing for lower rates since before he took office more than a year ago. Some members of the FOMC have agreed with him, most notably Steven Miran who was appointed to the Board by Trump last year. But Miran submitted his resignation after Warsh was confirmed as Fed Chair, reducing the number of dovish voices.
The argument for lower rates among FOMC members has been based on a weak labour market. If job growth is slow, then there is less disposable income to support inflation. However, the last two months of NFP have shown a solid recovery in the jobs market. It still isn’t back to growth levels, but it is not as weak as before. This is undermining one of the main arguments used by doves.
Trump Might Support a Hike?
One of the more controversial views is that the shifting dynamics of the market might mean that Trump appointees might favour at least more hawkish messaging. Treasury yields have been rising amid higher inflation expectations. High yields have long been an issue for the current Administration, with Treasury Secretary Scott Bessent clarifying in the past that Trump’s attacks on the Fed were meant to lower the benchmark Treasury yield.
Lower yields would have the same practical effect as a rate cut, thereby decreasing borrowing costs for financial instruments indexed to the benchmark. And it would lower the US government’s financing costs. Since yields are rising amid inflation fears, a more hawkish Fed could, somewhat ironically, calm markets and lower yields. With this calculus in mind, the Trump-appointed Fed Chair might take on a more hawkish stance.
The Inflation Over Employment Issue Again
The main issue traders will look at in the minutes is how many members expressed greater concern about inflation. Even if, at the time, they supported the language suggesting a cut, with the improvement in job numbers, they could be considered hawks. That would give analysts a clearer view of how strong the opposition a potentially dovish Kevin Warsh will face will be.
A more hawkish Fed would support the dollar amid higher yields in other countries, but continue to put pressure on gold. On the other hand, if the minutes sound more dovish than investors have anticipated, then the greenback could decline while precious metals surge.
