The July FOMC minutes were "overall balanced," according to Citi
Some strategists argued on Wednesday that the minutes from the July Federal Reserve meeting, at which policy makers increased the benchmark interest rate by 75 basis points, show that stock market participants were hasty to price in a “less hawkish” policy outlook.
According to minutes of the Federal Open Market Committee’s July 26–27 meeting, which were published on Wednesday, Federal Reserve officials decided in July that it was necessary to raise their benchmark interest rate high enough to slow the economy in order to combat stickier inflation.
Some Fed officials suggested that the policy rate would need to reach a “sufficiently restrictive” level in order to guarantee that inflation is firmly on a path back to 2 percent, and maintain that level for some time. All Fed officials agreed that moving to an appropriately restrictive stance of policy was necessary to avoid a unanchoring of inflation expectations.
However, the minutes also revealed that “many officials” expressed concern that the Fed might tighten monetary policy’s stance beyond what was necessary.
After cutting losses, U.S. stocks ended the day lower on Wednesday. To finish at 4,274.04, the S&P 500 SPX, -0.72% dropped 31.16 points, or 0.7%. The Dow Jones Industrial Average DJIA, -0.50% ended a five-day winning streak by dropping 324 points at its session low and losing 171.69 points, or 0.5%, to finish at 33,980.32. At 12,938.12, the Nasdaq Composite COMP, -1.25% fell 164.43 points, or 1.3%.
Citi economists argued that rather than suggesting a more dovish policy as investors analyzed the meeting summary, the minutes were merely “calls to remain data dependent in an uncertain and rapidly evolving environment”.
Andrew Hollenhorst and Veronica Clark, economists at Citi, wrote in a note that the minutes from the July FOMC “were generally balanced, reflecting a committee worried they might provide too little restriction to bring down inflation, but also concerned they might tighten by too much leading to an unnecessarily negative growth outcome”.
Stronger activity data, alarmingly high and persistent wage and price inflation, and looser financial conditions suggest that Chair Powell will find himself pushing hard once more for maintaining the “resolve” and “credibility” that the committee intends to reflect through its “forceful policy” actions, according to the minutes of the meeting.
Senior trader at InspereX in New York, David Petrosinelli, asserted that the market was overly optimistic and that the minutes were misinterpreted.
“The general market misinterpreting the minutes certainly wasn’t a new occurrence…
The Nasdaq Composite left bear market territory last week, and U.S. stocks have recovered from their mid-June lows. The Dow Jones Industrial Average and S&P 500 have also regained upward momentum. However, strategists argued that the market’s upbeat response to Chairman Powell’s press conference in July and the July economic reports was unwarranted.
“I believe that we are still in danger. We think the recent technology rally was optimistic and that the cycle of interest rate tightening is about to come to an end, according to Andy Tepper, managing director at BNY Mellon Wealth Management. Since there is still some worrying stickier inflation that the Federal Reserve needs to address, we frank think that may be a little premature.