Hints of hawkishness, but more lack of clarity

August 18, 2016

At first glance, Wednesday’s release of minutes from July’s FOMC meeting appeared slightly hawkish and relatively more optimistic about the prospects of a Fed rate hike this year. The minutes stated that some Fed members “anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.” This revelation gave some inkling that the Fed may at least be more divided when it comes to members’ opinions on near-term rate hikes, and perhaps not as dovish-leaning as it has been portrayed to be in the past few months. Also on the hawkish side was the assertion that “near-term risks to the economic outlook have diminished.”

At the same time, however, the Fed’s characteristic abundance of caution and indecision showed clearly through, as it continued to reiterate its consistent stance on requiring more positive economic data going forward in order to act. Also reiterated were ongoing concerns from some members over inflation reaching the central bank’s 2% objective. Additionally, while improvements in the employment situation were acknowledged, some members expressed concerns about the future pace of job creation.

Therefore, while July’s FOMC meeting minutes contained some hints of hawkishness, the Fed’s continued lack of clarity and consensus were evident. As shown through immediate price reactions after the release of the minutes, the financial markets apparently interpreted this lack of direction as more dovish than expected, or at least not as hawkish as previously anticipated. Immediate market reactions manifested this dovish interpretation as a quick drop for the US dollar, a surge for gold, and a modest rebound for US equities.

These market moves were reinforced by the Fed Fund futures market, which showed an implied probability of a September rate hike at 24% immediately prior to the release of the minutes, followed by a plunge down to 12% in the immediate aftermath. That probability settled at around 18% shortly after. As for a rate hike by the end of the year, the implied probability dropped from 58% to 46%, settling later at around 50%.

Overall, though, as the markets continued to digest the reality that the FOMC minutes generally failed to clarify anything at all, both the US dollar and gold prices soon returned to the ranges at which they had been trading prior to the release.

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