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- The Federal Reserve’s meeting minutes from the dovish December decision are of high interest early in 2024.
- Officials may wish to emphasize hawkish messages after markets ran with the Fed’s dovish message of upcoming rate cuts.
- Any US Dollar strength or stock retreat may prove short-lived in the current festive mood.
It is still cold out there – that will likely be the Federal Reserve (Fed) message as 2024 kicks off and the festive lights are removed from the streets. Nevertheless, any chill coming from the world’s most powerful central bank will likely be short-lived.
Here is a preview for the Federal Open Market Committee (FOMC) Meeting Minutes, due on Wednesday, at 19:00 GMT.
Markets got carried away by dovish pivot
Three rate cuts in 2024 – that was the message from the Federal Reserve’s “dot plot” on December 13. Chair Jerome Powell and his colleagues left rates unchanged and signaled more decreases in borrowing costs than previously anticipated. By slashing rate forecasts rather than increasing them, the Fed marked a turnaround in policy and signaled a victory over inflation.
Markets loved it – but perhaps too much –, pricing four to five cuts in 2024, with the first one coming in March. Bond yields have cratered, stocks have surged, and the Greenback is in the red. Investors tend to shoot first and think later, and may have gone too far.
Interest-rate cuts are coming in March, according to bond markets.
Source: CME Group FedWatch Tool
Fed officials would not like the fall in long-term borrowing costs to come so strong and so fast – it could encourage lending instead of saving, risking the achievements in depressing inflation. That is where the Meeting Minutes come in handy.
Fed uses minutes to convey messages
The protocols are set to document what was said in the two-day meeting where members put their forecasts. At that time, policymakers were influenced by the Consumer Price Index (CPI) data (published on the first day of their deliberations) and the Producer Price Index (PPI), which was released just before Powell took the stage. But not all members of the Fed’s board are fully aligned.
As the Meeting Minutes are revised until the very last moment, editors will likely emphasize messages officials want to convey – hold your horses. I expect the report to highlight hawkish members’ desire for caution before cutting rates and a commitment to refraining from cuts until they are sure such moves are essential.
Such a hawkish highlight would boost the US Dollar and chill down stock investors’ spines. It would also cool Gold.
However, I do not expect that effect to last for too long. First, the trend is strong – there is considerable optimism about a soft-landing scenario in which inflation completely disappears without a recession.
Second, markets take the Fed’s forecasts with a grain of salt. The bank was late to acknowledge that inflation is not transitory, and may be also late to accept that it has done enough or perhaps too much.
Third– and this relates to the first point – the Fed stresses it is data-dependent. Unless fresh figures have an inflationary bent, there is no reason to be scared of hawkish tones.
Final thoughts
I expect the Federal Reserve to release relatively hawkish meeting minutes, triggering a “risk off” market move. However, I do not expect it to last for too long.
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