Investing.com – Investors looked ahead Wednesday to the publication of the minutes from the July meeting of the Federal Reserve (Fed) at 18:00GMT, or 14:00ET, for clues as to the timing of the U.S. central bank’s return to monetary policy normalization.
The July 27 statement and said near-term risks to the U.S. economic outlook had diminished, but the Fed opted to maintain interest rates on hold and did not signal an imminent return to policy tightening.
The Federal Open Market Committee (FOMC) minutes, though often considered a lagging indicator since they represent the Fed’s thoughts from three weeks ago, will still be perused for details on policymakers’ outlook and will be especially relevant in light of the fact that no press conference was offered at the last meeting.
Some observers have commented that the strong July employment report, released after the July 27 decision, may have done much to turn the minutes into an anachronism.
However, experts from Bank of America Merrill Lynch (BoAML) appeared to hold a different opinion: “Headline payroll growth was strong, but with the unemployment rate steady, wages stable, and the labor force participation rate ticking up, the report does little to force the Fed\'s hand and leaves them comfortably on hold for now,” these analysts said in a note to clients.
Details under the microscope
Experts from Royal Bank of Scotland suggested that the minutes would likely follow the script provided by the July statement itself by noting that near term risks to the outlook are receding.
“But (they) may also begin to tilt the Fed’s assessment of the balance of risks towards further tightening again,” they said.
“This would be a clear signal policymakers think September’s FOMC meeting could potentially be a ‘live’ venue for changing interest rates,” RBS explained.
Their opinion was in line with remarks made on Tuesday by New York Fed chief William Dudley and Atlanta Fed president Dennis Lockhart.
UBS economists also said their focus would be to examine details about the key addition to the July statement: “Near-term risks to the economic outlook have diminished.”
They noted that this was the first mention of reduced risks since December when the Fed said risks to the outlook were balanced.
“If we are correct, it would suggest that July was the start of the clock for a year-end rate hike,” UBS explained.
Allianz SE chief economic adviser and former PIMCO chief exec Mohammed El-Erian noted growing recognition that the prolonged period of ultra-low interest rates could undermine the financial system.
“Hence, the Fed will leave the door open for a rate increase in September, and open much wider for December -- in hopes that the country’s policy regime may move away from excessive reliance on the central bank toward a more comprehensive response including more balanced demand management measures, structural reforms to amplify the economy's dynamism, actions to address pockets of over-indebtedness and much better global coordination,” El-Erian wrote in an opinion piece for Bloomberg.
Key factors ahead
With this idea that the Fed will be looking to signal for an end of the year move on policy, analysts identified key upcoming calendar events to keep an eye on.
UBS pointed to Fed chair Janet Yellen’s appearance at the Economic Symposium in Jackson Hole on August 26 and stated that they expect her “speech to support the view for a hike on the way in December”.
Meanwhile, RBS placed their focus on the August jobs report to be released on September 2 after the prior two months’ releases gave strong readings.
“Another firm report for August will increase FOMC members’ confidence further ahead of next month’s meeting,” they concluded.
Market reaction may be short-lived
While BoAML was expecting the minutes “to offer a bit more optimistic assessment of the U.S. economy and global financial conditions, similar to the July statement”, they weighed in on the possible reaction in currency markets.
“The knee-jerk reaction could see the dollar strengthen as this will be viewed on the hawkish side given the dollar selloff we have seen since the nonfarm payrolls report,” they said.
“But, a failure by the Fed to signal hikes are imminent and/or a more protracted normalization cycle means the FX market impact is likely to be short-lived,” they warned.
Markets ahead of the minutes at 13:40GMT, or 9:40AM ET
While waiting for the publication of the minutes, Wall Street opened flat to slightly lower. The Dow 30 fell 42 points, or 0.22%, the S&P 500 lost 4 points, or 0.19%, while the tech-heavy Nasdaq Composite traded down 15 points or 0.28%.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.18% at 94.92, off the previous session’s seven-week low of 94.38.
Gold for December delivery on the Comex division of the New York Mercantile Exchange dipped $8.85, or 0.65%, to trade at $1,348.05 a troy ounce, after rising $9.40, or 0.7%, on Tuesday.
Fed fund futures were currently pricing in a 12% chance of a rate hike in September, according to Investing.com’s Fed rate monitor tool. The odds for November and December were 15.6% and 47.8%, respectively.
Stay up-to-date on market expectations for future Fed policy moves by visiting:
http://www.investing.com/central-banks/fed-rate-monitor