FOMC minutes shape sentiment of market movements

 In Market View

Yesterday the US Federal Reserve Board released July’s FOMC minutes where the Fed provides their views on the US economy and forward guidance of its policy.  I always believe by reading into what minutes has revealed could help one to judge Fed attitude on current market condition.

Fed warned that “that the ongoing public health crisis would weigh heavily on economic activity, employment and inflation in the near term and was posing considerable risks to the economic outlook over the medium term”. However, FOMC minutes revealed no real urgency to act despite the downbeat econ outlook, with the Fed making no commitment to either expanding its asset purchases or strengthening it’s forward guidance in the immediate future.

As the Fed did not view yield curve targets as warranted for now, UST yields pushed higher on the Fed’s lack of backing for yield curve control, and the dollar saw short covering and gold backdown on higher yield prospective.

The market was expecting a hint that the Fed would stress a commitment to an extended period of ultra-accommodative monetary policy and shift towards strengthened forward guidance at the Sep FOMC meeting. Such expectation has resulted in the markets moving toward a sentiment of pressuring yield, weakening dollar, gold demand and bullish risk assets during the past weeks. But such expectation of Fed moves wasn’t forthcoming.

After the release, the USD was underpinned by short-covering tendencies as UST yields edged off their lows. Gold retreated from its testing to sit above 2000 and US stock indexes pulled back from its historical high, as positional adjustments were a distinct underlying factor driving the moves.

At this stage, the Fed’s review of it’s policy strategy remains ongoing, with Fed officials agreeing that “it would be important to finalize all changes to the statement in the near future”.

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