Minutes from the Federal Reserve’s latest monetary policy meeting loom over investors, who are growing concerned about how much higher interest rates will head, with fears about the future of rates sparking a sell-off in stock markets that will begin this week.
To be released at 2pm Eastern, a few minutes from Jan 31st to Feb 31st. The 1st FOMC meeting is likely to be the next catalyst for stocks after Tuesday’s defeat wiped out all gains for the stock market
Dow Jones industry average
this year.
At the last Fed meeting, the central bank slowed the rate of hikes, raising the federal funds rate by 25 basis points after much larger hikes – up to 75 basis points – last year. Tighter financial conditions, an attempt to stem decades-long inflation, helped make 2022 the worst year for equities since 2008.
Stocks rallied at the start of 2023 on hopes that the worst was over, but sentiment has recently been hit by mixed messages in economic data suggesting the persistence of rising prices. That could pose a problem for the Fed and lead to more rate hikes — and more pain for investors.
Even if the minutes, due to be released on Wednesday, are outdated — a strong jobs report and a spate of other influential economic data have arrived since the last FOMC meeting — investors will still be scrutinizing the tone of Fed officials closely.
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“The level of concerns about looser financial conditions can determine whether the market reads the minutes as hawkish or dovish,” said Andrew Hollenhorst, Citi’s chief US economist
.
Of particular interest will be any discussion of the decision to issue a smaller rate hike on February 1st, which has likely sparked debate among Fed officials after a series of historically large rate hikes over the past year.
“We expect a strong preference from the committee for sticking to the 25 basis point pace,” said Citi’s Hollenhorst.
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Nonetheless, futures markets have been pricing in increasingly higher interest rates over the past few weeks, including a greater likelihood that the Fed will hike 50 basis points after the next FOMC meeting on March 21-22.
It’s not just economic data that has spurred these more hawkish expectations, but also comments from Fed officials. Both Cleveland Fed Chair Loretta Mester and St. Louis Fed Chair James Bullard, neither of whom vote on the FOMC, have suggested a 50 basis point hike could come into play next month.
“That raises two questions,” said Michael Hewson, an analyst at brokerage CMC Markets. “One of them, as many other Fed members saw at the last meeting, is a compelling case for a 50 basis point move. And second, how much could that have shifted given the recent… US data over the past few weeks. The log should answer the first question, the second question needs to see more data.”
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The markets don’t have to wait long. Shortly after Wednesday’s minutes, personal consumption spending (PCE) data will follow on Friday. This is the Fed’s preferred measure of inflation and should give investors more to chew on no matter what comes out of the Fed minutes.
Write to Jack Denton at [email protected]
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