Stocks Fear the Fed Will Disappoint Again. Will FOMC Minutes Help?
Stocks Fear the Fed Will Disappoint Again. Will FOMC Minutes Help?
By:Ilya Spivak
The stock market is in trouble if the Fed still looks reluctant to cut rates
- Stocks plunged as the markets prepared to see July FOMC meeting minutes
- Fed rate cut speculation seems to be focused on what happens beyond 2025
- Another round of “risk off” selling looms if officials seem unsure on stimulus
The mood on Wall Street soured as traders looked ahead to the first of two major updates to Federal Reserve policy expectations due this week: minutes from July’s Federal Open Market Committee (FOMC) meeting. Markets will parse the document in hopes of finding a central bank that has become readier to cut interest rates.
The bellwether S&P 500 suffered its biggest one-day drop in three weeks, tracking down 0.57%. The tech-tilted Nasdaq 100 was similarly hampered with a loss of 1.38%. The US dollar rebounded to hit a one-week high against an average of its major counterparts, while gold prices have dropped to the lowest level since August 1.
Why are the markets still worried about Fed interest rate cuts?
All of this appears to reflect concern about the possibility that the Fed will disappoint the markets’ rate cut hopes. That seems odd at first because the likelihood of a 25-basis-point (bps) reduction at September’s FOMC meeting is broadly unchanged since the start of the week: traders still put the probability of that outcome at a commanding 84.9%.
In fact, the view for 2025 continues to broadly line up with what the US central bank’s own forecasting has argued since December. Benchmark Fed Funds futures have now discounted 48bps in stimulus, which is a slight rounding error away from the 50bps penciled in by officials. This relative consensus has mostly held for the better part of three months.
Speculative fervor appears to be focused on what happens thereafter. For its part, the Fed has owned up to just 25bps in rate cuts for next year in June’s Summary of Economic Projections (SEP). The markets have fully priced in at least two of them and see better-than-even odds of a third one before the calendar turns to 2027.
FOMC meeting minutes in focus amid hopes for a dovish rethink
It is here that signs of moderating optimism were most obviously on display as markets pre-positioned for the FOMC minutes to come across the wires. The tally shifted to 66bps, the lowest in two weeks and down from 75bps at the start of the month. That downgrades the probability of a third rate cut in 2026 from a certainty (i.e. 100%) to 64%.
The Fed left rates unchanged in July, as expected. Its statement warned that “economic activity moderated in the first half of the year” but pointedly removed language from June’s readout saying that uncertainty “has diminished.” Chair Powell argued that more data is needed before easing, warning that trade talks are “not close to clear outcomes”.
Fed Governors Christopher Waller and Michelle Bowman dissented from the majority opinion, arguing for a 25bps rate cut. That is the first time since 1993 that two members of Board of Governors have broken ranks with the committee. Powell praised Waller, Bowman, and the quality of the policy debate, acknowledging clear risks to the job market.
The key question now is whether traders will find enough in the minutes document to conclude that July marked a meaningful dovish shift on the FOMC as a whole. If it appears instead that last month’s dissents marked nuanced differences in timing and not a growing sense of urgency, a deeper setback for the markets looms.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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