Federal Reserve Meeting Minutes Lean Hawkish; Dow Jones Slips

Federal Reserve chief Jerome Powell helped open the door to the Dow Jones Industrial Average rally over the past three weeks with his comments at the close of the July 26-27 policy meeting that were perceived as dovish. But were they misconstrued? Fed meeting minutes released on Wednesday at 2 p.m. ET didn’t shift perceptions to any significant degree.

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After release of the Fed minutes, markets placed roughly 40% odds of a 75-basis-point rate hike on Sept. 21. That’s a bit lower than after the Fed’s July 27 meeting.

Still, optimism about a pivot to Fed rate cuts in the first half of 2023 had begun to fade. Markets now see the Fed’s key rate rising to a target range of 3.5%-3.75% as early as December from the current federal funds target range of 2.25%-2.5%.

Fed’s Neutral Rate

Probably the most surprising comment from Powell at his July 27 news conference was that the Fed, with its latest hike, had raised its key rate “right in the range of what we think is neutral.”

Fed policymakers have estimated the long-term neutral rate to be around 2.4%. However, given that inflation is running near four-decade highs, many economists see neutral as higher at the moment. Even dovish San Francisco Fed branch president Mary Daly has since said that she sees the neutral rate around 3.1%.

The Fed meeting minutes corrected any mistaken impression from Powell’s remarks. “With inflation elevated and expected to remain so over the near term, some participants emphasized that the real federal funds rate would likely still be below shorter-run neutral levels after this meeting’s policy rate hike.”

Fed Credibility

The minutes also seemed to push back against market expectations for a dovish pivot, which had already helped spark a six-week stock market rally following the June 14-15 meeting.

“In light of elevated inflation and the upside risks to the outlook for inflation, participants remarked that moving to a restrictive stance of the policy rate in the near term would also be appropriate from a risk-management perspective,” the minutes state. That would “better position” the Fed to hike further into restrictive territory, if needed.

Tighter Financial Conditions

The best news from the Fed meeting minutes: Policymakers didn’t express any concern about the easing financial conditions that accompanied the stock market rally, after the Dow Jones, S&P 500 and Nasdaq hit bottom on June 16 and 17.

To that point, the Dow had rallied 6.3%, the S&P 500 6.9% and the Nasdaq 8.6% from 52-week closing lows.

Financial conditions were characterized as having “eased modestly” but remaining “substantially tighter” than at the start of 2022.

In other words, the glass was half full.

Dow Jones, Treasury Yield Reaction To Fed Meeting Minutes

After the Fed minutes, the Dow Jones erased its losses, but then faded again. The Dow closed down 0.5%, the S&P 500 0.7% and the Nasdaq 1.25%, all about where they were they were before the 2 p.m. ET release.

The 10-year Treasury yield, which hit a four-week high of 2.92% after a mostly better-than-expected retail sales report, pulled back to 2.89%, but still up 10 basis points.

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