Minutes from the Federal Reserve’s July meeting — policymakers raised benchmark interest rates by 75 basis points at the meeting, suggesting stock market participants were too quick to price in a “less hawkish” policy outlook, some strategists said on Wednesday.
Fed officials in July agreed on the need to raise the benchmark interest rate high enough to slow economic growth to combat rising inflation, according to minutes of the July 26-27 Federal Open Market Committee meeting. The meeting was released on Wednesday.
Fed officials agreed that “an appropriately restrictive policy stance is essential to avoid disjointed inflation expectations,” while some said policy rates must reach a “sufficiently tight” level to ensure inflation is firmly back at 2% and remains there for some time.
However, the minutes also showed that “many officials” expressed concern about the risk that the Fed might over-tighten its monetary policy stance.
U.S. stocks closed lower on Wednesday after recouping losses. The S&P 500
As investors parsed in the minutes, Citi economists argued that the minutes did not imply more dovish policy, but merely “called for maintaining Data Dependency”.
“The July FOMC minutes were generally balanced, reflecting a committee’s concern that they may offer too little restraint to reduce inflation, but also that they may tighten too much to prevent Negative growth outcomes are necessary,” Citi economists Andrew Hollenhorst and Veronica Clark said in a note. “Following the meeting, stronger activity data, worryingly high and persistent wage and price inflation, and accommodative financial conditions suggest that Chairman Powell will again be tough to maintain the ‘resolution’ and ‘credibility’ meeting Minutes, which indicate the Committee intends to reflect through their ‘strong policy’ action.”
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David Petrosinelli, senior trader at InspereX in New York, also thinks investors are overly optimistic and misinterpreted the minutes.
“This is certainly not the first time the general market has misunderstood the minutes…people think it’s less hawkish, but when I read the minutes, that’s not what I read.” Petrosinelli in told MarketWatch in a phone interview Wednesday. “I just think, at the end of the day, the Fed knows they have an inflation problem. I think they know they’re not close to being restrictive in terms of rates, and I think they’ll get there.”
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U.S. stocks have Bouncing back from mid-June lows, the Nasdaq Composite pulled out of last week’s bear market, while the Dow Jones Industrial Average and S&P 500 also experienced fresh upward momentum. However, the market’s upbeat reaction to Chairman Powell’s July press conference and July economic report was premature, strategists said.
“I don’t think we’re out of the woods yet. We believe the rebound in tech stocks is promising, and we’re nearing the end of the rate-tightening cycle,” BNY Mellon Wealth Management Managing Director Manager Andy Tepper said by phone. “Frankly, we think this may be a bit premature, and the Fed still has some worrisome sticky inflation to deal with.”