Normally, the FOMC minutes impact are the highlight of the week. But, the market is unlikely to ignore them when they come out on Wednesday as they focus on a much more pressing matter: The Fed’s symposium at Jackson Hole, Wyoming. That doesn’t mean there won’t be a surprise, though.
Markets have been on a bit of a roller coaster since the start of August when a disappointing NFP number shocked the market. Investors suddenly looked around and saw there was a bunch of US economic data that wasn’t as good as initially thought. They have since become a little bit more reassured. But a lot of the recent rebound in the market relies on a large shift in expectations for the Fed and the FOMC minutes impact on those expectations.
Why So Worried?
For months now, many economists and analysts had been fretting that the Fed would wait too long to start easing. Chief among them is JPMorgan Chase’s CEO, Jamie Dimon, who had expressed this concern a year ago. He gets extra notoriety for being the head of the largest bank in the world. When the poor NFP data came out right after the Fed declined to cut rates, this narrative spread like wildfire, hurting markets.
The Fed acknowledges that its current monetary policy is “restrictive”. That means the high rates are seen as slowing the economy, but it’s necessary to bring down inflation. That’s a normal operation of the central bank, so by itself isn’t particularly worrisome. But keeping rates in restrictive territory can slow the economy too much, and that might tip it over into a recession. For now, it appears that the market has agreed that the worst case scenario is unlikely, but that’s thanks to an expectation that the Fed will cut rates by a total of 100 bps by the end of the year.
Too Much of a Good Thing?
The Fed, however, hasn’t changed its “dot-plot” matrix forecast which shows only one rate cut for this year. In order for Powell to match the market’s expectations when he gives his pivotal speech on Friday, he would have to imply a large change in the Fed’s position.Unless there has been some kind of substantial softening of the Fed’s stance that becomes evident in the FOMC minutes impact, a major change is unlikely.
Moving from “we think well hold for a while” to “we think it’s about time to cut rates” would be a major change for the Fed, but that doesn’t imply the kind of massive rate cuts that the market is pricing in. Which means there is a substantial risk of a market “correction” in the order of previous times this year when it has predicted way more rate cuts than the Fed would actually deliver. That would likely end up strengthening the dollar compared to its peers, particularly the Euro.
The EURUSD has been climbing mostly because the ECB already started cutting, and markets think there are only two more rate cuts coming for the shared currency this year. That would be half as much what is currently expected for the greenback. But if the market were to interpret Powell’s commentary to be less dovish, and move back to pricing in just one rate cut per meeting through the rest of the, the dollar could pick up some strength. And that could cause the EURUSD to tip over and end it’s latest uptrend.