FOMC minutes preview: 3 key areas to watch
City Index August 19, 2015 7:05 PM
<p>After the quiet, “dog days of summer” trade of the first half of the week, major financial markets could see a big injection of volatility […]</p>
After the quiet, “dog days of summer” trade of the first half of the week, major financial markets could see a big injection of volatility with the release of the July FOMC minutes this afternoon. As a reminder, the central bank came off as less hawkish than expected at its meeting three weeks ago, noting that the risks to the economy were “nearly balanced,” that only “some” further job improvement was needed, and that job gains have been “solid.” Critically, the vote to keep interest rates unchanged in the 0.00-0.25% range was unanimous, with no members dissenting in favor of an immediate rate hike.
Of course, the entire purpose of the minutes is to shed more light on the single-page statement released three weeks ago, and with traders split over whether the Fed will raise interest rates in September or not, today’s release will be closely scrutinized. In our view, there are three major areas to focus on this afternoon:
1) The decision to tweak the wording of the July statement
In its July statement, the Federal Reserve tweaked its view of the labor market, noting that it wanted to see “some further improvement” before raising interest rates (from just “further improvement” beforehand – yes, this actually is something traders analyze). The FOMC is intensely aware of the impact even subtle changes to its statement can have, so this change was almost certainly discussed at length in the meeting. Information-starved traders will try to “read between the lines” of the minutes to determine exactly what the central bank meant by this tweak and how close the members are to voting for a rate hike.
2) The economic and policy perspectives
The end of the minutes typically discusses the members’ current views on the economy and monetary policy and can give a good indication of which way the voters are leaning. It was in this section of the June minutes where we learned that “One member, however, indicated a readiness to take that step at this meeting but also expressed a willingness to wait another meeting or two for additional data before raising the target range.” If this “one member” metastasized into “a few” or “several,” it would increase the odds of a September rate hike and likely boost the greenback in the process.
3) Recent changes to the global economy
While it is tempting to put the minutes on a proverbial pedestal – after all, who would know more about the Fed’s upcoming plans for monetary policy than the central bank itself? – it’s important to remember that these views are constantly evolving. In the last three weeks, we’ve seen a renewed decline in global energy and commodity prices, as well as a volatility-inducing devalution of the Chinese yuan. Both of these unexpected developments have likely cooled the central bank’s desire to raise interest rates, at the margin (to say nothing of this morning’s slightly-weaker-than-expected CPI report). Therefore, traders may look at any modestly hawkish comments in the minutes as “stale” and instead focus on the upcoming data and Fed speeches.
In terms of the potential market impact, the dollar is likely to rally (and stocks may struggle) if the minutes reveal that the central bank is closer to raising interest rates than the statement implied. Conversely, a more dovish or cautious perspective on the economy could hurt the dollar at the expense of the equity market.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.