Wednesday’s biggest story for the financial markets is the disclosure of the minutes or notes presented by the Federal Open Market Committee (FOMC) for the meeting held on December 13 and 14, 2022. As you may recall, that was the time when Federal Reserve Chairman Jerome Powell enacted a hike of the federal funds rate by 50 basis points (bps) or 0.5%. The federal funds rate is important because it influences other lending rates, such as for auto loans, credit cards, and mortgages.
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The minutes don’t change anything from the meeting itself; the federal funds rate is still currently within a range of 4.25% to 4.5%. However, the language used in the meeting’s notes might clarify how the central bank’s officers intend to shape monetary policy throughout 2023.
The verbiage in the minutes of the meeting wasn’t super-tough, but financial traders expecting highly accommodating language were likely disappointed. The notes indicated that the FOMC officials expect interest rates to stay elevated until they have “confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”
Moreover, the Federal Reserve’s step-down from 75-basis-point interest rate hikes to December’s 50-basis-point hike shouldn’t be interpreted as a sign that the inflation problem has been solved now. As the FOMC put it, “a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”
All in all, financial traders should probably expect interest rates to remain elevated during the next few months, at least. The FOMC meeting’s minutes indicated this, stating, “Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective.”
The Stock Market’s Reaction to the FOMC Minutes Was Slightly Negative
Stocks didn’t crater after the FOMC meeting’s minutes were released, but investors weren’t very pleased, either. Almost an hour after the publication of the minutes, the S&P 500 (SPX) and Nasdaq 100 (NDX) declined from bright green to slightly above breakeven. Meanwhile, the Dow Jones Industrial Average (DJIA) fell slightly into the red.
Perhaps traders had hoped that a strongly dovish FOMC meeting minutes would kick-start 2023 into a massive rally after 2022’s dismal performance. So far, though, it appears that the Federal Reserve will remain data-dependent and cautious and that a pause or pivot isn’t imminent.
For the time being, then, it’s difficult to use the Federal Reserve’s words to build a strong bullish case for the stock market. The next step will be to keep a close watch on U.S. inflation data, which the nation’s central bank will undoubtedly be watching as well.
