FOMC Minutes Preview: How Will Markets React To Fed's Rate Clarity?

Investors are eagerly anticipating Wednesday’s 2:00 p.m. ET release of the minutes from the latest Federal Open Market Committee (FOMC) meeting held on July 25-26. At the July FOMC meeting, policymakers opted for a 0.25% rate hike, pushing rates to 5.25-5.5%, following a brief pause in June, amid resilient economic momentum and tight labor market.

The primary focus of investors revolves around discerning if this marks the Fed’s final rate hike. Equally crucial is the quest for insights into how long the Fed plans to keep rates at their present elevated levels prior to opting for a cut.

Fed Chair Jerome Powell reiterated at the press conference the significance of upcoming data related to the labor market, inflation, and global financial conditions in steering the Fed’s future decisions.

Markets See The End of Tightening As Most Likely Scenario

Investor sentiment predominantly indicates that the Fed will opt to avoid any further rate hikes going forward.

Fed futures are signaling an implied probability of around 90% for this outcome in the September meeting and 65% in the November meeting.

As for the first rate cut, the market anticipates a likelihood exceeding 50% only for the May 2024 meeting.

Also read: July’s Resilient Retail Sales Spark Speculation About Fed Policy, Amazon Prime Day Effect: 3 Hot Takes From Economists

Table: Market-implied probabilities on next Fed’s interest rate decisions CME

Meeting Date	Days to Meeting	Ease	No Change	Hike
09/20/2023	35	0.00%	88.50%	11.50%
01/11/2023	77	0.00%	64.64%	35.36%
12/13/2023	119	5.23%	62.02%	32.75%
01/31/2024	168	21.89%	53.39%	24.72%
03/20/2024	217	44.32%	40.47%	15.21%
05/01/2024	259	74.34%	20.84%	4.82%

Mixed Signals From Fed Members

Recent public statements from Federal Reserve officials have underlined the importance of data in determining rate trajectories.

Minneapolis Fed President Neel Kashkari emphasized on Tuesday the need to avoid premature tightening to prevent a scenario akin to the 1970s. While expressing satisfaction with inflation progress, he refrained from ruling out further tightening.

Richmond Fed President Tom Barkin said that there is still time before the next meeting to see how the economy and inflation are behaving, while his colleague, Atlanta Fed President Raphael Bostic hinted at a lack of urgency for a September rate hike.

Despite the unanimous decision to raise rates by 25 basis points in July, a growing divide appears between hawks and doves on the board, foreshadowing potential future disagreements.

Potential Market Reactions

Should the FOMC minutes unveil a substantial risk of further rate hikes in September and November, as indicated by a line akin to “a majority of participants believe additional interest rate adjustments are warranted,” markets could be in for a significant shakeup.

With the prevailing consensus leaning towards the end of the tightening cycle, this hawkish stance could spur volatility in the stock market. The SPDR S&P 500 ETF Trust SPY and the Invesco QQQ Trust QQQ could extend their recent declines, reflecting investor unease.

Alternatively, if the minutes adopt a more dovish tone, with the majority of participants signaling contentment with current interest rate levels as sufficient to bring inflation back to the 2% target, this could reinforce existing market expectations.

Such an outlook might provide relief in rate-sensitive assets like tech stocks, gold, and commodities by removing lingering concerns about further hikes. On the flip side, the dollar might face downward pressure due to reduced expectations of rate tightening.

Now read: Hedge Funds Target Tech In Q2, Increasing Positions In Meta Platforms, Microsoft, Nvidia, Apple

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