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The May FOMC meeting minutes are due at 1800 GMT today

With the market all riled up today on the risk-off tone that is swarming over, let’s not forget that we’ll be getting details from the Fed’s discussion during the 1-2 May meeting. So, what are the key items you should be looking out for when the minutes are released?

1) Inflation overshoot

The Fed “upgraded” its inflation outlook in the May meeting (statement here) in saying that inflation ex-energy and food “have moved close to 2%” while saying that inflation “is expected to run near the 2% objective”. While recent data certainly suggests that, the key thing now is how the Fed handles a possible inflation overshoot.
Or more specifically, how comfortable are they with an inflation overshoot? From comments by Fed speakers, they appear comfortable with inflation sitting somewhere around 2% to 2.5%, but the real risk now is if it starts moving to the upper end of that and closer to 3%.

That presents a risk of the Fed having to tighten to keep inflation in check but at the same time risk suffocating the economic expansion. A lot of this is still conjecture at this point, as it would also depend on what factors are driving inflation higher – and whether or not they are temporary/transitory.

2) Global risks

The Fed has so far largely discounted the risks of a trade war but now with the added potential of emerging markets, it’ll be interesting to see how much the Fed believes in that there are added risks to them proceeding with rate hikes while the rest of the world is struggling to keep up.

With a rising dollar and higher yields, a lot of pressure is being put on emerging markets and while the risk of a contagion is currently low – it should not be ignored entirely. The Fed has so far brushed aside those risks, but should emerging markets edge closer and closer to a blowup it will most certainly put their tightening cycle at risk too.

3) Yield curve

Not a topic that is too flashy but warrants some merit.

It is one on the back of every one’s minds as the possibility of an inverted yield curve continues to grow. Fed speakers have been rather on the fence about it but if the Fed continues to tighten and the yield spread between the front end and long end of the curve narrows further, it will be a hot topic of debate in the coming months.

And that will also start to gather a lot of attention in the market as the Fed risks tightening into a signal indicating that there is a risk of a recession coming.

While the issues above aren’t exactly market moving upon release, they are important in terms of assessing the Fed’s tightening cycle moving forward. And they will also help us traders to understand what sort of things the Fed is paying attention to as they look to hike rates by another 2-3 more times later this year.

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