FOMC Minutes Preview: Does the Fed Know Where It's Leading Markets?
FOMC Minutes Preview: Does the Fed Know Where It's Leading Markets?
By:Ilya Spivak
The markets seem spooked after conflicting messages from Federal Reserve officials.
- Stocks fell as bonds, gold, and the US dollar rose in seemingly “risk off” trade
- Traders may be getting worried about a lack of cohesion at the Federal Reserve
- September FOMC meeting minutes may keep the markets in defense mode
Risk appetite evaporated on Wall Street after a seemingly strong start to the week. The S&P 500 fell 0.4%, erasing the prior day’s rally and putting the bellwether index of US stocks on course for weekly loss. The tech-tilted Nasdaq 100 fell 0.58% while the small-cap Russell 2000 lost a hefty 1.1%.
Curiously, Treasury bonds turned higher, and yields fell. Lower borrowing costs have been supportive for equity markets recently amid Fed interest rate cut speculation, but this had clearly stopped working. Odder still, the US dollar tracked broadly higher despite weaker lending rates, which typically undermine the currency’s yield-seeking appeal.
Stocks fall as bonds, gold, and the US dollar rise amid risk aversion
Gold prices continued to march higher against this backdrop, unbothered by the stronger greenback despite the metal’s typically anti-fiat profile. Silver lost ground however, adding to the sense that something had gone awry on the sentiment front. It tends to show a greater sensitivity to risk trends than its more expensive counterpart.
Perhaps most interesting of all, these moves appeared without a clear-cut catalyst. The US government shutdown has derailed official economic data releases, leaving traders to parse a slew of comments from Fed officials for direction cues. Here too, an obvious lead was pointedly absent.
Minneapolis Fed President Neel Kashkari said that it is too soon to know if inflation from the Trump administration’s tariff policies will be sticky and warned that some data is sending “stagflation” signals. He added that if the US central bank were to lower rates drastically, a burst of high inflation ought to be expected.
Mixed messages from the Fed spook markets as FOMC minutes loom
Newly minted Fed Governor Stephen Miran – on leave from being the Chair of the Council of Economic Advisers at the White House while moonlighting at the Fed through year-end – sent mixed messages. He said that a lot of uncertainty has lifted compared with the first half of the year yet argued that this doesn’t have firm implications for policy.
He went on to say that he is more sanguine than others about inflation and does not see the tariffs as a material driver of price growth, adding that the markets’ reaction to Fed easing supports a push to aggressively cut rates. This seemed to amount to incongruously singing the economy’s praises and calling for powerful stimulus at the same time.
Perhaps the clash in these messages was itself the trigger for the markets’ defensive mood. Kashkari sounded a lot like the Fed’s majority view, as might have been asserted by Chair Jerome Powell himself. Miran clearly disagreed yet also seemed to be at odds with some of his own ideas.
All eyes now turn to September’s Federal Open Market Committee (FOMC) meeting minutes. Wall Street may continued to face selling pressure while haven-seeking capital flows buoy bonds and the US dollar if the document paints policymakers as struggling to cohere around a common vision.
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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