Preview of the Fed Meeting Minutes: Hawks to Dampen Market Enthusiasm, "Rate Cut Frenzy" May Take a Break

Zhitong App noticed that the minutes of the upcoming meeting to be released by the Federal Open Market Committee (FOMC) in the United States may pour cold water on the market.

It is still cold outside, which may be the message the Federal Reserve is about to send. However, any chill from the world's most powerful central bank is likely to be short-lived.

Market is clouded by dovish sentiment

Three rate cuts in 2024 - that was the message conveyed by the "dot plot" of the Federal Reserve on December 13. Federal Reserve Chairman Powell and his colleagues kept interest rates unchanged and hinted that the magnitude of the decline in borrowing costs would exceed previous expectations. The Fed's downward revision of rate expectations, rather than an upward revision, marks a shift in policy and a victory over inflation.

The market liked this view - perhaps too much - with expectations of four to five rate cuts in 2024, with the first one expected in March. Bond yields plummeted, stocks soared, and the dollar was in a losing position. Investors tended to shoot first and think later, and may have gone too far.

According to bond market data, rates are expected to be cut in March.

Federal Reserve officials do not want long-term borrowing costs to decline so strongly and rapidly - this could encourage lending rather than saving, potentially undoing the efforts to curb inflation. This is where the minutes of the meeting come in.

The Fed uses meeting records to convey information

These minutes will record the remarks made by officials during the two-day meeting, where they each presented their own forecasts. At the time, policymakers were influenced by the Consumer Price Index (CPI) data (released on the first day of their deliberations) and the Producer Price Index (PPI). However, not all members of the Federal Reserve Board were in complete agreement.

As the minutes are being revised until the last moment, they may emphasize the message that officials want to convey - don't rush. It is expected that the report will highlight the desire of hawkish members to remain cautious before cutting rates and promise not to do so until it is deemed necessary.

Such a hawkish highlight will boost the dollar and dampen the spirits of stock investors. It will also cool down gold.

However, analysts believe that this impact will not last long. Firstly, the trend is strong - investors are quite optimistic about the prospect of a soft landing, where inflation disappears without a recession.

Secondly, the market is skeptical of the Fed's forecasts. The institution admitted late that inflation was not temporary and that it had done enough, or perhaps too much.

Thirdly - and this is related to the first point - the Fed emphasizes its reliance on data. Unless the latest data shows a tendency towards inflation, there is no reason to fear the hawkish rhetoric.

Summary

It is expected that the Federal Reserve will release relatively hawkish meeting minutes, triggering a "flight to safety" market trend. However, this trend will not last long.