FOMC Minutes and Chance of Dovish Tilt

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Fed officials have been doing a lot lately to try to convince the market that monetary policy will continue to tighten. But, given the overall weakness of the dollar compared to just a month ago, it seems the market isn’t buying it. The interesting thing about the FOMC release minutes later today is that we get a better look at what Fed officials have been saying internally. And see if it matches their more public, hawkish tone.

However, not everything is simple. Given how the markets reacted to the CPI figures, there seems to be a lot of pent-up optimism. That means many traders might prefer the more positive interpretation of what the Fed might say. And there are plenty of comments in the Fed minutes to wade through, giving plenty of opportunities to find dovish patches for those inclined to believe so.

It’s not the first time

In the past, it was kind of a rule that the minutes were kind of opposite to the policy statement right after the meeting. So, if the statement was dovish, the minutes are usually interpreted as more hawkish, and vice versa. This is more a product of survival bias. That is, because the statement is intended to be interpreted in a certain direction, the contrary facts are omitted. But they remain in the statement.

To better illustrate this, let’s assume that the FOMC is debating whether or not to raise rates. That discussion for and against will be in the minutes. But when they decide eventually to raise rates, then all the reasons for raising rates will be put in the statement – but not the reasons against. Then, when the minutes are published, the market has already heard the acceptance comments in the statement. But the rest of the dovish statements are seen as “new”.

What does that mean this time

We must remember that after the last meeting, the initial reaction in the market was to take the statement as quite dovish. It wasn’t until Powell’s presser later, in which he said that interest rates were likely to rise more than the market expected, that the markets took the outcome of the meeting to be sharper.

So, if the minutes are contrary, then it would be assumed that the initially perceived dovish statement would imply a more hawkish interpretation of the minutes to be published later. This time, too, there is no press conference with Powell to double down on the acceptance comments.

What is the key point?

The thing the market is likely to hang its hat on is something Fed officials have been talking about in recent weeks. That is a theory that it takes at least one year for monetary policy to affect inflation. The Fed has been front-loading policy with its hyper-aggressive rate hike. The statement even alluded to this, mentioning the lag between the policy and the intended effect.

What this means is that the Fed may not have to see inflation come down significantly closer to target to ease the tightening. Hence the initial statement was seen as dovish. The context of this could be the main point of the minutes. Was this more of an academic discussion (and policy will continue to tighten), or was it seen as part of possible rate decisions in the future (and policy may not tighten as much as Fed officials are trying to make the market believe).

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