The Federal Open Market Committee (FOMC) meeting minutes are a detailed account of the discussions that took place among Federal Reserve officials during a monetary policy meeting. They provide additional insight into how policymakers viewed the economy, inflation, employment and the appropriate path for interest rates.
However, despite containing a great deal of information, the FOMC minutes are very rarely a major market-moving report. The reason is simple, the minutes are old news by the time they are released.
In fact, the minutes are published approximately three weeks after the FOMC rate decision. By then, traders have already had several weeks to digest the decision, the statement, the press conference and subsequent comments from Fed officials. Traders therefore usually have a much more up-to-date understanding of the Federal Reserve’s thinking than the minutes can provide.
For example, suppose the FOMC meets on September and decides to leave interest rates unchanged. The market immediately knows the policy decision and statement, while the Fed Chair explains the Committee’s thinking during the press conference. Other Fed officials then provide their own views in speeches and interviews during the following weeks.
The minutes of that meeting might not be released until early October and a lot can happen in three weeks. Economic data can materially change the outlook for inflation or the labour market. Oil prices can move sharply because of geopolitical developments. Financial conditions can tighten or loosen. Markets can significantly reprice the expected path of interest rates. And Fed officials themselves can change the way they communicate their policy outlook.
The minutes tell us what the Fed was thinking several weeks ago, while markets are constantly trying to price what the Fed will do next.
The current situation is a good example
Fed’ Williams and Fed’s Jefferson have recently pushed back against expectations of an October rate hike. As a result, market pricing has shifted significantly, with the probability of an October hike now standing at around 21%.
For the market to price a higher probability to an October hike, for example 50% or more, the market would likely need a significant change in the economic data or macro/geopolitical picture. An important catalyst would be a hot CPI report, given the importance of inflation to the Federal Reserve’s reaction function.
This shows you why the minutes are even less important in the current environment. The minutes reflect the discussion that took place at the previous FOMC meeting. But since then, traders have received new information from Fed officials and the economy. Williams and Jefferson have provided more recent guidance, while incoming inflation data could still change the policy outlook.
Markets are forward-looking
The market is constantly pricing and repricing expectations about the future based on the incoming information. That’s what moves asset prices. Markets are forward-looking. The market doesn’t care what the Fed thought three weeks ago because it priced those expectations weeks in advance. The market cares about what the Fed is likely to do at its next meeting and beyond.
The most useful information tends to be information that can change expectations about the future path of monetary policy. This is why traders should pay close attention to three things between FOMC meetings:
- Fed communication: Speeches, interviews and public comments from voting and influential Fed officials can provide a much more current picture of the Committee’s thinking. These comments can also reveal whether the balance of risks is shifting.
- Economic data: Inflation, employment, wages, economic activity and financial conditions all influence the Fed’s reaction function. When a particular piece of data is especially important to policymakers, its release can have a much larger impact on rate expectations than an old set of meeting minutes.
- Macro and geopolitical developments: Fed officials regularly explain which risks they are monitoring. If those risks materialize, the implications for monetary policy can change even though nothing in the previous FOMC minutes has changed. This is important when geopolitical developments affect energy prices and inflation. A significant move in oil prices, for example, can alter the inflation outlook and therefore change expectations for monetary policy.
How should traders use the minutes?
This does not mean that FOMC minutes are totally useless. They can still provide information about the distribution of views inside the Federal Reserve. They can reveal disagreements between policymakers, show which economic risks were being discussed and provide additional details that were not included in the policy statement or press conference.
For reference, you can use this table that shows the hierarchy of the quantitative words used in the FOMC minutes:
The problem with the minutes is that their marginal informational value is often very low. By the time they are released, much of the information has already been communicated through subsequent Fed speeches and incoming economic data. Therefore, the minutes should generally be treated as context rather than a fresh catalyst.
This article was written by Giuseppe Dellamotta at investinglive.com.