FOMC Minutes Likely To Show 'Balanced Tone,' But Market Counting On 25 Bps Cut Minimum In September

The Federal Open Market Committee (FOMC) releases its minutes from the July 30-31 rate policy meeting on Wednesday. Investors expect a “balanced tone” with no surprise hints as to what to expect for September other than what they are already expecting: a 25 bips rate cut.

“We expect the Fed won’t reveal too much,” said Shane Vernier, a market analyst at HowtoTrade.com. One thing is certain: the Fed will likely avoid in those minutes committing to a specific target or date for a rate cut, preferring to leave it open to allow for flexibility, he said.

Still, Wall Street is expecting a rate cut of 25 basis points in a month.  Could it be more?

“I don't think the market would be surprised if they cut the rate by 50 basis points,” Vernier said. “The important thing would be what speculators would think if the Fed cut the rate by 50 basis points. And I think it would be safe to assume that the general stance would be that the Fed has become desperate and highly dovish if they did that. Never say never.”

According to Bloomberg, over $3 trillion has been added to the S&P 500 since that one day drop on August 5 when everyone thought the sky was falling.

Anthony Pompliano, creator of 255,000-strong subscriber-based The Pomp Letter, wrote on August 19 that job numbers are being revised downward, which calls into question any narratives about a strong economy firing on all eight cylinders. The Bureau of Labor Statistics (BLS) is expected to revise lower its job numbers for the April 2023-March 2024 period by up to 1 million.

Pompliano noted that the non-partisan Legislative Analysts Office for the State of California released their updated full 2023 jobs numbers back in June and those were completely flatlined – “no job growth (in California) in 2023”, that office said. No job growth at all. That's pretty bad.

On Monday, the Conference Board’s Leading Indicator Index (LEI) fell in July after falling slightly in June. The index is still strong, over 100. The Conference Board doubts we are heading for a recession.

“The LEI continues to fall on a month-over-month basis, but the six-month annual growth rate no longer signals recession ahead,” Justyna Zabinska-La Monica, Senior Manager for Business Cycle Indicators at The Conference Board, said in a statement. “A sharp deterioration in new orders, persistently weak consumer expectations, softer building permits, and hours worked in manufacturing drove the decline. These data continue to suggest headwinds in economic growth going forward.”

The Conference Board expects U.S. real GDP growth to slow over the next few quarters as businesses and consumers take a spending break.

This indicator, along with BLS's revisions, won’t appear in Wednesday’s FOMC minutes. But it will weigh on the September Fed policy meeting when a decision about interest rates will be made.

Chicago Fed chairman Austan Goolsbee said this weekend he is still not sure if the Fed will cut rates in September. He is just signaling to the market here that Wall Street sell-offs and upticks in unemployment are not going to spook the Fed board. Rolling 12-month inflation ended July at 2.9%.

"We've been making clear for a while what economic conditions would be appropriate for us to cut rates,” Goolsbee said on the Face the Nation program on Sunday.

But the Fed may have other indicators to worry about. Last week, Goolsbee said that if the labor market weakens further, the Fed may be too late if it does not cut soon.

July unemployment rose to 4.3%. While the increase was small, from 4.1% from a month prior, it has steadily risen from around 3.5% earlier in the year thanks to an 8.5% prime rate and a 5.5% Fed funds rate.

Labor is cooling and inflation has cooled right along with it because unemployed people tend to spend less money, driving down demand for goods.

“Even contrarian Neel Kashkari admits it’s time to focus more on unemployment,” said Vladimir Signorelli, head of boutique investment research firm Bretton Woods Research in Long Valley, New Jersey. “A 25 basis points cut is essentially priced in for September. The FOMC minutes should show a growing confidence in inflation’s retreat alongside rising concern over economic weakness,” he said.

From his offices in Montana, Vernier said, “Most of us would expect a steep sell-off in the equity markets if the Fed doesn't cut interest rates."

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.