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- Minutes from the latest Federal Reserve meeting may shed emphasis on the dovish tilt in the text.
- The document is revised before the release, considering the weak inflation report.
- Markets have tended to see the glass half-full in recent weeks – and that is unlikely to change.
“Turning our back to forward guidance” – those following central banks closely will have noticed that this catchphrase belongs to the European Central Bank, not the Federal Reserve. The Washington-based institution does guide markets, and this is one of the reasons to expect the US Dollar to fall in response to the market-moving FOMC Meeting Minutes.
I will run through three reasons to expect markets to cheer and the Greenback to glide lower in response.
1) Dovish tilt in the statement
The Federal Open Market Committee (FOMC) deliberates every word in its statement, and these words caught markets’ attention at the time of the last FOMC on November 2 (emphasis mine):
…the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation…
What do these changes signal? The Fed acknowledged in its statement that It had already raised rates significantly and that it could slow down the pace of raising rates, waiting to see the effects on inflation. Markets cheered in response to prospects of lower rates and the US Dollar lost steam.
The Minutes from the same meeting, meanwhile, are set to explain this change of tone and provide a reminder that a 50 bps hike is likely in December, not a 75 bps one like the previous four. That is Dollar-negative.
2) Countering last month’s outcome
I just said that markets cheered the statement, so how would countering the outcome be negative for the Dollar? Only 30 minutes after the release, Fed Chair Jerome Powell took to the stage and said interest rates would reach higher levels than expected.
He clarified that while the Fed could slow down in the next meeting, the final rate would be more than previously thought and more than markets had expected. If that was not enough, he verified that he disliked the initial, positive market reaction. By then, stocks were already down and the Dollar was up.
In the past few years, the Minutes tended to provide a counter-punch to the outcome of the rate decision – a hawkish twist in the minutes after a dovish outcome to the rate decision, and vice versa. History may well repeat itself, or at least rhyme.
Moreover, since the Fed’s last meeting, the US has released a weak inflation report. The Core Consumer Price Index (Core CPI) rose by only 0.3% in October, half of the rate in the previous three months – a significant improvement.
The Fed’s minutes are revised until the last moment and to reflect incoming data. They are crafted to reflect changes by emphasizing specific topics and de-emphasizing others. I expect the release to amplify voices saying inflation may soon reach a peak. Another Dollar downer.
3) Market reactions
Only two days after the Fed decision, markets showed what they really wanted to see. A mixed report resulted in a surge in stocks and the Dollar’s fall. The weak CPI report mentioned above triggered a massive rally, further taking the Dollar down. And when China denied it was planning to reopen the economy – markets shrugged it off.
At least until the next inflation report, I expect investors to see the glass half full rather than half empty – to cling onto good news to rally rather than get depressed from downbeat data. That would weigh on the safe-haven Dollar.
Final thoughts
The FOMC Meeting Minutes are released just before the Thanksgiving holiday, and investors may rush to find Black Friday bargains – almost regardless of the nuances in the report. The mere publication may unleash “animal sporting” as Americans get ready to gobble up some turkeys.
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