MARKETSWall Street reacts to July Fed minutes
The minutes from the Federal Reserve’s July monetary policy meeting showed that Fed officials were divided on the timing of the next interest rate rise.
Some argued to move right away while others urged a more wait-and-see approach as inflation continues to remain subdued. fastFT rounds up key takeaways from the minutes.
Millan Mulraine, economist at TD Securities, said a key consideration in the Fed minutes centred on inflationary pressures but that the overall tone was dovish. He said:
On the whole, the tone of the July minutes was somewhat dovish, relative to the hawkish message from Dudley yesterday that a September hike remains “on the table.” Nevertheless, it points to increased confidence in the US economic picture (with the downside near term risks being seen as “diminished”) underscoring the Fed’s tightening bias.
As a result, we continue to see the risks tilting in favor of a later rather than a sooner hike and our base-case remains for the Fed to stay on the sidelines until June 2017, though we cannot rule out an earlier move entirely.
Brett Ewing, chief market strategist of First Franklin, said while the minutes signalled that September was still on the table, the Fed discussions also detailed more excuses for delaying rates. Mr Ewing does not expect a rate rise till after the US presidential election:
With the latest Fed minutes released today we saw much of the same thing we have seen throughout 2016. Excuse after excuse on why they must wait to raise rates. This is a smart tactic to push expectations on something most in that room don’t want to do until they are entirely sure of a stable world situation. Expect more of the same until after the election.
Kit Juckes at Societe Generale said “hawks balanced with the doves” in the meeting and that the minutes would be a plus for emerging markets and corporate bonds. He said:
I’m still sure that the FOMC would like the market to price a bit more in, but only because when they finally act, they don’t want the dollar to go up too much (if at all) and risk sentiment to suffer too much (if at all).
There is nothing here to dissuade investors from having a bias to have a short vol, long yield strategy. Winners still include [emerging markets, high yield, corporate bonds] and for the rest of the week, probably don’t include the dollar. Once upon a time this would have been good for the Nikkei and bad for the yen but now, yet again, we find USD/JPY dragged lower by relative yields as everything yesterday’s data and Bill Dudley achieved, is undone.
Paul Ashworth, economist at Capital Economics, noted that the minutes were “dated” and said investors should instead look ahead to Jackson Hole. He said:
Markets are now focused on what Chair Janet Yellen will have to say in her Jackson Hole speech on August 26th (a week tomorrow). We expect Yellen to leave all options on the table. But assuming core inflation picks up in the coming months and third quarter GDP growth shows a marked rebound from the first half of this year, then a December rate hike looks to be the most likely outcomet should rebound significantly later this year as the deflationary impact of the dollar’s rise in 2014 and 2015 fades further.