FOMC Minutes: Did Markets Misread Powell’s Post-Fed Comments?
Matt Weller, CFA, CMT January 9, 2019 7:28 PM
The minutes from each Federal Reserve meeting are released three weeks after the meeting itself, meaning that they’re generally stale under the best of circumstances...
The minutes from each Federal Reserve meeting are released three weeks after the meeting itself, meaning that they’re generally stale under the best of circumstances.
That sentiment is especially true this time around following the massive outbreak of volatility around the holiday period, when the S&P 500 fell 8% in the four days following the Fed’s December meeting…only to rally back 10% off those lows as of writing. In the interim, Fed Chairman Powell walked back his post-meeting comments, noting that the central bank will be “patient” in its approach to monetary policy, that there is “no preset path for raising rates” or adjusting the balance sheet, and that he was “listening very carefully” to markets.
Despite that disclaimer, today’s FOMC minutes still contained some valuable nuggets about the central bank’s plans heading into 2019 and beyond. Below are the major headlines from the minutes (emphasis mine):
- MANY FED POLICYMAKERS SAID FED COULD AFFORD TO BE PATIENT ABOUT FURTHER POLICY TIGHTENING GIVEN MUTED INFLATION PRESSURES
- A FEW OFFICIALS FAVORED NO RATE INCREASE AT DEC. MEETING
- FED OFFICIALS SAW EXTENT, TIMING OF FUTURE HIKES AS LESS CLEAR
- SOME OFFICIALS NOTED DOWNSIDE RISKS MAY HAVE INCREASED
- FED DISCUSSED RESERVES OPTIONS INCLUDING IOER, REDEMPTION PACE
In essence, the central bank is suggesting that monetary policy will be increasingly flexible and “data dependent” moving forward, in contrast to the relatively formulaic one-hike-per-quarter pace that we saw through 2018. Furthermore, the discussion around IOER and redemption pace suggests that the balance sheet winddown is not on “autopilot,” as many traders feared.
Given the tone of these minutes and recent policymaker comments, we can conclude that markets interpreted Fed Chairman Powell’s post-meeting press conference incorrectly; in other words, the “Powell Put” may still be in force, with the central bank remaining hyper conscious of market volatility when setting policy. The market tail continues to wag the Fed dog.
As of writing, the CME’s FedWatch tool shows that traders are pricing in an 85% chance that interest rates remain at or below current levels through the entire year, so the central bank (and the US economy more broadly) has plenty of work to do if we’re going to see much in the way of interest rate increases this year.
Risk appetite was saw a slight boost following the release of the minutes, with major US stock indices now trading back above pre-Fed-meeting levels. The S&P 500 is now testing a key level of previous-support-turned-resistance at 2600, which could determine whether the next 100 points are to the upside or downside heading into Q4 earnings season.
Meanwhile, the US dollar is still the worst-performing major currency on the day (see yesterday’s article, “US Dollar: Why 2019 Could Break Bulls’ Hearts” for more on the longer-term outlook for the greenback).
Source: TradingView, FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.