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

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  5. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Lion economies

    A nickname given to Africa's growing economies.
  4. Factor Investing

    An investment strategy in which securities are chosen based on ...
  5. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
RELATED FAQS
  1. 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 >>
  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 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 >>
  4. 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 >>
  5. What are some of the most popular ETFs that track the retail sector?

    Some of the most popular exchange-traded funds (ETFs) that track the retail sector include the iShares S&P Global Consumer ... 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

COMPANIES IN THIS ARTICLE
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!