Fed minutes initial market reaction: equities rally, gold briefly surges, dollar spikes down before rebounding

<p>The minutes for September’s Fed meeting were released Thursday afternoon, and the markets initially viewed the details of last month’s meeting as leaning towards the […]</p>

The minutes for September’s Fed meeting were released Thursday afternoon, and the markets initially viewed the details of last month’s meeting as leaning towards the dovish side.

Cited as reasons for leaving US interest rates unchanged were global economic and financial market concerns, slow growth in China, a high dollar, and low inflation. It was therefore decided that “it was prudent to wait for additional information confirming that the economic outlook had not deteriorated.”

Some Fed members “acknowledged that recent global economic and financial developments may have increased the downside risks to economic activity.”

In addition, “participants anticipated that the recent global developments would likely put further downward pressure on inflation in the near term. Compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside.”

The September 16-17 meeting resulting in a Fed decision to leave interest rates unchanged was followed two weeks later by a disappointing US non-farm payrolls employment report that left many market participants doubting the prospects of a 2015 rate hike.

As might have been expected, the initial market reaction to the meeting minutes on Thursday was strong. The US dollar fell, while gold and the equity markets rallied after a lackluster day for US stocks. After the news settled, however, the dollar pared its losses and began to rebound while gold pared its gains and began to retreat, partly due to the steady gains in stocks. The S&P 500 maintained its gains and continued to rally shortly after the news release.

While the minutes of the Fed meeting gave some insight into the members’ various concerns that precluded a decision to raise rates, major uncertainty with regard to rate hike timing continues to hang over the markets. On the one side, the minutes contained dovish remarks regarding the state of the global economy and inflation. On the other side, Fed members reiterated in September that the Fed was still on track to raise rates later this year. It should be kept in mind, however, that these remarks were made before the weak US employment numbers were released in early October.

For the time being and in the coming weeks and months, the dollar, equity markets, and gold will need further economic information as it relates to the timing of a Fed rate hike in order to find some clearer near-term direction.

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