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The minutes of the last meeting
Falling interest rates in the statement:
Counteract last month's result:
The minutes of the latest meeting of the Federal Reserve could underline the tenor of a deeper interest rate situation. The document will be revised before publication in light of the weak inflation report. Markets have tended to see the glass half full in recent weeks - and that's unlikely to change.
"We're turning our backs on forward guidance" - those who follow central banks closely will have noticed that this buzzword belongs to the European Central Bank, not the Federal Reserve. The Washington-based institution controls the markets, and this is one of the reasons why the dollar is likely to fall in response to the market-moving minutes of the FOMC meeting.
Here are my three reasons why the markets will cheer and the dollar will slide lower in response.
The Federal Open Market Committee (FOMC) considers every word in its statement, and these words caught the attention of markets at the last FOMC meeting on November 2 (emphasis mine):
...the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation...
What do these changes mean? The Fed acknowledged in its statement that it had already raised interest rates significantly and that it may slow the pace of rate increases to wait for the impact on inflation. Markets reacted with jubilation to the prospect of lower rates, and the dollar lost value.
The minutes of the same meeting will explain this change in tone and remind us that a 50 basis point rate hike is likely in December, not 75 basis points as in the previous four. This is negative for the dollar.
I just said that the markets cheered the statement. So how would a reversal of the outcome be negative for the dollar? Just 30 minutes after the release, Fed Chairman Jerome Powell took the stage and said that interest rates would reach a higher level than expected.
He clarified that while the Fed could taper at the next meeting, the final rate would be higher than previously thought and than markets had expected. As if that were not enough, he confirmed that he did not like the initial positive market reaction. By that time, stocks had fallen and the dollar had risen.
In recent years, the minutes have typically provided a counter to the outcome of the interest rate decision - a hawkish (rising rates) turn in the minutes following a dovish (falling rates) outcome of the interest rate decision and vice versa. History could well repeat itself, or at least rhyme.
In addition, the U.S. has released a weak inflation report since the last Fed meeting. The core Consumer Price Index (CPI) rose just 0.3% in October, half the rate of the previous three months - a marked improvement.
The Fed's meeting minutes are being revised until the last moment to reflect the new data. They will be designed to reflect the changes by highlighting certain topics and downgrading others. I expect the release will add to the voices saying inflation may peak soon. Another downer for the dollar.
Just two days after the Fed decision, markets showed what they really wanted to see. A mixed report led to a rise in stocks and a fall in the dollar. The weak CPI report mentioned above triggered a massive rally that pulled the dollar down further. And when China denied that it was trying to revive the economy, markets took it in stride.
At least until the next inflation report, I expect investors to see the glass half-full rather than half-empty - to cling to good news to rally rather than let bad data get them down. That would weigh on the safe-haven dollar.
The FOMC meeting minutes will be released just before the Thanksgiving holiday, and investors may be rushing to find bargains for Black Friday - almost regardless of the nuances in the report. The mere release of the minutes could trigger a "run" as Americans prepare to gobble up some turkeys.