DailyFX.com -

In the wake of the FOMC minutes from the June 17-18 policy meeting, the US dollar slipped against its major counterparts and the S&P 500 paced a rebound in ‘risk’-sensitive assets. This market reaction contradicts what we have come to expect from the connection between market performance and monetary policy. Through the swell of stimulus and QE-style programs, we have seen speculative appetite buoyed by the proliferation of such support programs and the local currency hurt by the subsequent swell in the money supply as well as a drop in rates. And yet, these minutes support the de-escalation of these exceptional programs, yet the response looks much like a vow of additional support was issued.

Below are a few of the noteworthy highlights in the transcript of the central bank’s last meeting:

  • Staff anticipates a ‘brisk’ rebound in 2Q GDP
  • Growth in second half of 2014 and through next two years expected to outpace 2013 and rise more quickly than potential
  • Generally agree that a $15 Bln Taper in October would end QE program so long as outlook holds
  • Supervisory measures should be applied to address excessive risk-taking and associated financial imbalances
  • Some Fed Officials considered investors are growing too complacent on financialrisks – a factor in market performance

On a fundamental basis, the known end of the QE3 program – designed to purchase Treasuries and MBS on a monthly basis to keep yields low – translates into a reduction in support for ‘risk taking’ within the financial markets. That would in turn insinuate investors, increasingly on their own in managing their exposure without the backstop of Fed support, would reduce some of their exposure. Yet, that is not the immediate reaction as we can see in equity indexes’ climb after the release.

Furthermore, the full Taper firms up a milestone that will further lead to the actual withdrawal of accommodation – in other words: rate hikes. That should in turn lift yields (the return for the currency) and the dollar. Yet, as we can see below, the USDollar extended its retreat following last week’s response to the strong employment report.

USDollar Daily Chart

FOMC Minutes See Growth, End of QE and Financial Risk

Charting Created by John Kicklighter usingMarketscope 2.0

For interest rate forecasts, we have seen a tepid response in short-term Treasury yields (which typically rise as rate and inflation expectations rise). The same is true of Fed Fund futures which are instruments specifically tailored towards hedging interest rate changes (see both below). Yet, this moderate response should not be considered a measure of doubt or contradiction. Rather, we have more likely priced in much of the spirit of this report from a monetary policy perspective.

The Taper – or halt to the open-ended stimulus regime – is a first step towards actual tightening. The consistency of the central bank’s reductions since December has led the market to linearly project an end to the program at that same time. There is similar feeling towards the projected rebound in GDP through 2Q and strength through the second half of 2014. Through these expectations, we have seen shorter-term yields have been trending higher for some time – ‘pricing in’ the eventuality of a hike. This is especially true of this particular set of minutes that follow up on the Fed’s quarterly meeting where they issued forecasts and Chairwoman Janet Yellen conducted a question-and-answer press conference.

FOMC Minutes See Growth, End of QE and Financial Risk

This particular report is not without market impact however. Over the medium-term, it reinforces the time frame of a change in monetary policy bearings. In particular, a first rate hike mid-2015 seems more likely. Yet, as we can see in the Fed Funds futures below, the market is still discounting their expectations for hikes. Though the end of 2015, the market sees a 0.78 percent benchmark rate versus the 1.12 percent average from the Fed’s forecast. At the close of 2016, it is 1.76 percent versus the Fed’s own 2.50 percent. There is plenty of reconciliation to be found here.

FOMC Minutes See Growth, End of QE and Financial Risk

On this front, one major consideration is the composition of the FOMC board that will be voting when the proposed time for the first hike comes around. The current assumption of the group is very vague with few actually offering up a clear-cut bias so early in the game.

FOMC Minutes See Growth, End of QE and Financial Risk

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  2. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  3. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  4. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  5. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  6. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  7. Mutual Funds & ETFs

    Top 5 Emerging Market ETFs

    Find out which emerging markets ETFs have enough of an asset base, trading volume and low fees to be considered top choices in the segment.
  8. Mutual Funds & ETFs

    How to Profit From Market Volatility Using ETFs

    Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction.
  9. Mutual Funds & ETFs

    The Best Currency ETFs

    We look at the best currency ETFs for gaining exposure to various global currencies, based on daily volume and performance.
  10. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  6. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!