The Federal Reserve on Wednesday shook the financial markets by not what they did, but by what they did not do. The minutes of last month’s US Federal Reserve meeting gave some indication as to whether an even more dubious shift in its policy framework is possible this fall.
The news came as a disappointment to some US Dollar bears, triggering a chain reaction in the financial markets, led by a spike to the upside by the greenback. The rise in the dollar pushed gold prices sharply lower, while investors were encouraged to dump the Euro and the high-flying Australian Dollar as well. Meanwhile, investors spun the less-than-good minutes to highlight their speculative long positions in U.S. equities.
Key issue: average inflation target
Although most investors assumed that the Fed minutes would not reveal too many secrets about future Fed policies, speculation has been rife that the Fed will adopt an average inflation target, and try to push inflation above 2% to make it years. ran below, as part of a broader policy review, Reuters said.
But the minutes were vague on the issue and simply said, “a number” of Fed members thought it would be helpful to re-make a revised statement on its policy strategy, without providing details or timing.
Gloomier Outlook for Economy
The minutes also sounded rather bleak about the U.S. economy and skeptical about snatching up government bond yields as a means to encourage recovery and investment – leading to a modest sell-off in Treasuries.
Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation over the long term and pose many risks to the economic outlook over the medium term,” the summary said. the meeting.
FOMC members worried about overall growth
Because of the impact the virus will have on the economy, FOMC members said they expect the current lending rate to remain at 0% -0.25% overnight until they ‘trust that the economy has weathered past events and was on track to achieve the Committee’s maximum employment and price stability objectives. ”
New concerns about risks to financial system
Although Powell and other Fed officials have repeatedly said that banks and related institutions are generally in strong shape, committee members said at the meeting that they were concerned that this could change if the spread of the virus continues and “ignore more. get scenarios about the future.
Officials worried about burgeoning levels of public debt
The federal government is now $ 26.6 trillion in debt, winning more than $ 3 trillion during the pandemic when Congress and the White House rushed to get help for those affected by the economic shutdown.
This has coincided with an impetus in the Treasury market and raises concerns that the high level of expenditure “may have implications for the functioning of the market.”
Finally …
The price action in the financial markets after the release of the minutes suggests that investors may not have been aware when the minutes did not show much consensus by the FOMC to adopt a regulation for inflation, which is something so many may for have positioned.
Furthermore, investors can hope for more clarity from the Fed regarding significant policy changes that may take place at the September 18 meeting.
Check out our economic calendar for a look at all of today’s economic events.
