The release of the minutes from the last FOMC meeting could be especially relevant this time around. At that meeting, the Fed hiked rates for the first time this year. Markets are trimming back expectations for rate hikes amid softer US data and rising bond yields. The minutes provide additional insight into what FOMC members were thinking and which factors are important in determining monetary policy. Traders will compare the Fed’s projections with the data released since then. They will look for any notable change in the outlook.
At the last meeting, members unanimously decided to raise rates. The meeting also included the latest economic projections and the so-called “dot plot matrix”. At the time, the Fed raised its inflation outlook. Of the 18 board members, 16 expected at least one more rate hike by the end of the year. In his post-rate decision press conference, Fed Chair Kevin Warsh stuck to his position of not providing forward guidance. However, he also justified the rate hike, saying that the job market remains solid.
The Data and Situation Have Shifted
Notably, since the last Fed meeting, last Friday’s NFP came in well below expectations. Not only that, revisions also lowered the prior readings. July data initially came out negative before a revision turned it positive. A further revision then turned it negative again. Markets had put about even odds on a rate hike at the end of October. Since then, the market has cut those projections to just 20%.
Futures still price in a more than 80% chance of a rate hike at the Fed’s final meeting in December. So, the issue for now seems to be timing, rather than whether the Fed will actually hike. But with other central banks in hiking mode, the timing is essential for dollar pairs. If the Fed appears to be falling behind other major central banks, particularly the ECB, then the dollar could weaken. Gold has been under pressure as the Fed turns to hiking. However, it could gain support if the Fed looks likely to keep delaying its monetary tightening.
What to Look For
The FOMC minutes record each member’s views at the time. However, members can revise some of their comments in light of subsequent data. This allows the FOMC minutes to better reflect the Fed’s current thinking. The market will likely pay close attention to the balance of concerns each member expresses. It will then try to tally hawks and doves again to gauge support for an October rate hike.
At the last meeting, the impression was of broad, firm support for continued hikes. As such, it’s hard for the FOMC minutes to be substantially more hawkish. However, there is plenty of room for dovish signs.
Counting the Odds of the Next Hike
If members show minimal concern about the labor market, traders could interpret the minutes as hawkish. This could support the dollar and weigh on the euro. On the other hand, the discussion might highlight data dependency or note that higher long-term yields are doing some of the work. Traders could see this as dovish. That would likely weaken the dollar further while providing some support for gold.
Traders will also look for words quantifying the degree of support, such as “many”, “several” or “some”. If “many” members noted a particular issue, markets see this as a stronger consensus than “several”. They understand “some” to mean a minority.
