The FOMC Minutes: No Cuts in Sight – Orbex Forex Trading Blog

A lot has changed since the last time the FOMC met. And a lot more could change before the Fed’s rate-setting board meets again. That’s why traders will likely be very interested in the minutes of the latest meeting, to get clues about what happens next. Particularly to get context on how to interpret the key data points that are coming up before the March 20th gathering at the Fed.

One of the big things that have changed is the number of rate cuts that were expected. Up until just a couple of weeks ago, the market was fully pricing in a total of 150bps of cuts by the end of the year. That would be six rate cuts, assuming that the Fed eased at a normal pace of a quarter of a point per meeting.

Coming Down to Earth

The combination of a more hawkish rate decision statement, strong jobs growth and hotter than expected inflation caused the market to significantly adjust its expectations. Now the market is pricing in only 100 basis points of easing, which amounts to four rate cuts. The first is priced in for June. Even so, there isn’t a strong majority for those four rate cuts, with over 40% of traders expecting fewer than that.

The Fed has insisted since the start of the year that only three rate cuts would be necessary. Some members suggested even fewer, and there were even some comments from FOMC members that were interpreted as implying that there would be no rate cuts. So, the market’s move over the last couple of weeks towards less easing is seen as aligning with the expectations of the Fed and the consensus among economists.

Expectations Align, But What About Currencies?

If rates stay higher, then presumably so would yields. But yields also depend on how much Treasury supply there is. If there are a lot of bonds for sale, then yields will have to go up to attract buyers. With the Fed rolling off $90 billion a month from its balance sheet, and high fiscal deficits, it would seem that pressure would be on the upside for yields.

But two things have been happening recently to keep yields down. The first is that the Treasury is issuing fewer bonds, as it has stockpiled over $700 billion in cash. Also, the expectation that rates will go down has led to investors pulling money out of the reverse repo facility. This is kind of a technical phenomenon, but it amounts to more investors holding on to their bonds as they expect them to be worth more when yields go down. The net effect is equivalent to quantitative easing, which supports the stock market and keeps yields down. In turn, that makes the dollar relatively weaker, given the other data.

What to Expect from the Minutes

The market is largely expecting a reiteration of the hawkish stance from the February meeting. If there is any hint of easing sooner than in the second half, the market would likely be shocked, and the dollar could weaken. A ratification of the current expectations would likely keep the status quo, with the dollar trending its current path.

Given the recent shift towards expecting less easing, the market could be already primed for a more hawkish FOMC minutes. That means the surprise to the upside could be more limited, or fade faster.

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• Source: https://www.orbex.com/blog/en/2024/02/the-fomc-minutes-no-cuts-in-sight