Stock market participants have been too quick to price in a “less hawkish” outlook for US monetary policy, based on minutes of the July Federal Reserve meeting, at which policymakers hiked interest rates by 75 basis points, released Wednesday. some analysts argue.
US stocks struggled to find direction Thursday morning. The S&P 500 SPX fell 1 point, or less than 0.1%, to trade at 4,273. The Dow Jones Industrial Average DJIA fell 80 points, or 0.2%, to 33,900 after falling 171.69 points on Wednesday. The Nasdaq Composite COMP rose 11 points, or 0.1%, to 12,951.
However, US stocks have recovered from their mid-June lows, with the Nasdaq Composite exiting the bear market last week, while the Dow Jones Industrial Average and S&P 500 also saw renewed upward momentum. But strategists said the market’s bullish reaction to Chairman Powell’s July news conference and July economic reports was premature.
Federal Reserve officials agreed in July that it was necessary to raise interest rates high enough to slow the economy to combat high inflation, according to minutes of the Federal Open Market Committee’s May 26 meeting released on Wednesday. until July 27th.
Fed officials agreed that “the transition to appropriately accommodative policy is essential to avoid unanchoring inflation expectations,” while some suggested that the policy rate would need to reach “enough restrictive” levels to ensure the Inflation remains firmly on course to come back down to 2 percent and remain at that level for some time.
However, the minutes also showed that “many officials” said they were concerned about the risk that the Fed could tighten monetary policy more than necessary.
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However, as investors analyzed the meeting’s summary, Citi’s economists argued that the minutes did not indicate more dovish policy, but merely “calls to remain data-dependent in an uncertain and rapidly evolving environment.”
“The July FOMC minutes were overall balanced, reflecting a committee concerned that there might be too little restraint to bring down inflation, but also concerned that tightening too much could result in an unnecessarily negative growth outcome ‘ Citi economists Andrew Hollenhorst and Veronica Clark said in a note.
“Following the meeting, stronger activity data, worryingly high and persistent wage and price inflation, and looser financial conditions suggest that Chairman Powell will make another aggressive push to maintain the ‘determination’ and ‘credibility’ the committee intends to reflect through their ‘vigorous political’ actions.”
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David Petrosinelli, a senior trader at InspereX in New York, also argued that investors were overly optimistic and misinterpreting the protocol.
“Certainly this wouldn’t be the first time the general market has misinterpreted the log…The perception that this was less hawkish, but that’s not what I read reading the log,” Petrosinelli told MarketWatch in a Wednesday phone interview. “I just think at the end of the day the Fed knows they have an inflation problem. I think they know they’re nowhere near restrictive on rates and I think they’ll get there.”
“They also pointed out that they were only considering the fact that commodity prices, especially oil, tend to be volatile and that they were not really comforted by this drop in oil,” Petrosinelli said. “I think it’s right that they’re focusing on that.”
Meanwhile, Goldman Sachs economists led by Jan Hatzius wrote in a note that the July FOMC minutes contained little new information and were broadly consistent with what Chairman Powell offered at the July press conference. However, Goldman stands by its forecast that the FOMC will slow the pace of rate hikes to 50 basis points in September and 25 basis points in November and December for a final rate of 3.25-3.5%, citing the minutes, that “eventually” it would probably be appropriate to slow down the pace of wandering.
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“I don’t think we’re over the hill yet. We believe a tech rally has been hopeful and that we are nearing the end of the rate hike cycle,” Andy Tepper, managing director at BNY Mellon Wealth Management, said over the phone. “Honestly, we think this might be a little premature that there is still worrying, more stubborn inflation for the Federal Reserve to deal with.”