Fed Minutes: Markets Seek Clues on Future Policy Amid Softer Data

What happened

The minutes from the Federal Reserve's September meeting are set to be released on Wednesday at 2pm ET. In that meeting, the Fed unanimously raised interest rates by 25 basis points, and members' projections indicated an expectation of one more hike in 2026. However, since then, the economic landscape has shifted, with the release of a weaker September payrolls report and softer August PCE inflation data. These milder data points have led the market to significantly reduce the odds of another rate hike as early as the October meeting, which are now priced at less than one in four.

Why it matters

The minutes are important because, while they do not reflect the most recent economic data, they will reveal the level of conviction among Fed members regarding the projection of one more rate hike in 2026. The market will be looking for signs of significant divisions within the committee, even after the unanimous vote. A more dovish tone, indicating that a meaningful group of officials was already uneasy about further hikes, could confirm current market pricing. Conversely, a hawkish account, emphasizing stubborn inflation and the risk of stopping too soon, could lead traders to reconsider and increase the odds of an October hike. Recent statements from some Fed officials, such as John Williams and Philip Jefferson, suggest there is no rush for further increases, while Michelle Bowman has indicated a preference for no further hikes in 2026.

Market impact

• Interest Rates and Bonds: A dovish-leaning account, reinforcing expectations of a pause in rate hikes, would likely lead to a drop in front-end Treasury yields. A hawkish tone, conversely, could cause yields to rise again, especially on the short end of the curve.
• Dollar and FX: A more dovish scenario for the Fed, with a lower probability of further hikes, would tend to weaken the dollar, as it would reduce the interest rate differential favorable to the US currency. A hawkish tone could strengthen the dollar.
• Equities: A Fed less inclined to raise rates is generally seen as positive for equities, as it eases concerns about the cost of capital and economic growth. A dovish tone could offer support to stock markets, while a hawkish tone would be a headwind.
• Commodities: Gold, which has been weighed down by expectations of further hikes, could find support in a dovish account. Commodities in general may react positively to a weaker dollar and growth prospects less impacted by high interest rates.
• Brazil: A weaker dollar globally and the expectation of a less aggressive Fed would tend to be positive for the real and the Ibovespa, as it reduces capital outflow pressure and improves risk appetite in emerging markets. Brazilian interest rate futures could react with a decline, following the global trend.

What to watch

In addition to the Fed minutes, the market will be attentive to speeches by Federal Reserve members, such as Michelle Bowman's on Tuesday, which could provide early signals about the tone of internal discussions. Future US inflation and employment data will remain crucial to confirm or invalidate the interpretation of the minutes and expectations regarding the Fed's next steps.

Scenarios

Base Case: The minutes reveal divisions and a slightly more dovish tone, confirming the market's current pricing of a pause in rate hikes, leading to a slight drop in Treasury yields and a weaker dollar. Risk Scenario: The minutes surprise with a more hawkish tone than expected, emphasizing persistent inflation and the need for further tightening, which could reignite bets on an October rate hike and lead to higher Treasury yields and a stronger dollar.

Original source: ForexLive (InvestingLive). For information only, not investment advice.