Quoting Donald Trump here, “the crazy Fed” released its official minutes of the September meeting report on Wednesday night which showed that many participants in the meeting believed that the Central Bank should continue on the course of raising rates to ensure a stable economy. A majority of Fed officials think that the short-term rates are still low and they are capable of boosting the overall economic growth by encouraging borrowing, investing and spending. The Fed has been lifting short-term rates since December 2015, from near zero to slightly over 2%. During the last meeting in September, Fed officials voted to lift their benchmark federal-funds rate to a range between 2% and 2.25%.
There was no surprise in what the Fed said; however, the dollar stood its ground and bolstered versus its major peers. The dollar index, which measures its value against six major peers, hit the session high. It was traded at 95.664, up 0.1 percent on Thursday. And there was no mention of Donald Trump and his comments on rate hike during the release of the minutes.
Usually, the Fed minutes are the highlights of the meeting and are less likely to excite or surprise the markets. However, traders still seek hints to get the clarity on the directions of equities and other assets class. The center point of the FOMC (Federal Open Market Committee) minutes was when the Fed should stop the hiking process. They could wait until the short-term rates become restrictive and restrain the US economy from growing or they can stop while the effects are neutral and there is no such restraint.
The objective of the Fed when devising the monetary policy is to fine tune the fed funds rate to achieve the maximum employment and an inflation target of 2%. A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.
However, few things were left unsaid in the minutes which carry significant weight in regards to what is happening in the global markets right now. The Fed expects to raise rates three times next year and perhaps one time in December before the year ends. This year has not been a very good one for emerging market assets. The equities have dropped ahead of negative sentiments arising due to the trade war, and the most of the emerging market currencies have seen the downfall which includes, Brazilian Real, Argentinian Peso, Turkish Lira and Indian Rupee. A stronger dollar has become the safe haven for investors and continue to remain strong against its peers. Fed’s hawkish tone has led to an increase in 10 Year Treasury yield to 3.197% and 30 Year Treasury yield to 3.364%. The strength in the dollar is likely to remain in spite of a not so impressive labor and wage numbers during September. If the Fed executes their plan of action, then we may witness a further hike in the dollar which might hurt the American exports especially when the world stands on the brink of a trade war. The stronger dollar also makes the foreign debt more expensive for the rest of the world.
We have seen in the past that former Fed chair Janet Yellen resisted in tightening the policy in September 2015 due to instability in emerging markets. The Fed that time started normalizing rates in December 2015 when the situation was a little better. The Fed now is obviously thinking about the adverse effects of their firm policy stance on the stability of emerging market assets.
Former Federal Reserve Chairman Alan Greenspan called the current labor market “tightest” he has ever seen. The comments from Donald Trump on the Fed raising the rates too quickly shows that it can be hard for Powell and other FOMC officials to execute their strategy. The equities did not take the FOMC minutes very well too.
The Dow Jones Industrial Average fell 45.48 points, or 0.18 percent, to 25,752.94, the S&P 500 gained 1.47 points, or 0.05 percent, to 2,811.39 and the Nasdaq Composite dropped 0.99 points, or 0.01 percent, to 7,644.50.
European stocks hit a one-week high in early trade but then were pulled lower by a 1.9 percent fall in an index of auto stocks. Goldman Sachs said slow demand in China could hit earnings in the sector.
The pan-European STOXX 600 lost 0.40 percent and MSCI’s gauge of stocks across the globe shed 0.13 percent.
Emerging market stocks lost 0.07 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.21 percent higher, while Japan’s Nikkei rose 1.29 percent.