With Investors on Edge, Fed Minutes Gain Heightened Importance

The specter of inflation is haunting the financial markets this summer, triggering a wave of unease that has led to a significant sell-off in stocks and bonds throughout August. The markets are grappling with the apprehension that the Federal Reserve’s efforts to quell rising prices might not yet be complete. Investors are now anxiously awaiting the release of the Federal Reserve meeting minutes (fed minutes) for July, scheduled for 2 p.m. Eastern time on Wednesday, seeking insights into the future direction of interest rates.

In response to persistent inflationary pressures, the central bank raised its prime lending rate by a quarter of a percentage point the previous month. While policy-makers left room for further rate hikes, given that inflation remains notably above their targeted 2 percent, the markets remain restive. Despite recent data indicating a moderation in inflation since the last rate-setting meeting in July, the markets are still in turmoil.

Tuesday’s robust retail sales figures and the hawkish commentary from certain central bankers have heightened market tensions. Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, a wealth management firm, pointed out that investors will be closely scrutinizing the tone of the Fed’s minutes report, particularly gauging whether it leans dovish or hawkish. Bartels emphasized, “The Federal Reserve might find itself compelled to persist with interest rate hikes due to the unexpectedly robust performance of the economy.”

Fed Minutes
Inflation fears have led to a sell-off in stocks and bonds in August as the markets fret the possibility of more interest-rate increases. Reproduction/Internet.

Neel Kashkari, President of the Minneapolis Fed and a voting member of the rates committee, is among those adopting a hawkish stance. While he acknowledged on Tuesday that he was detecting “positive signs” of inflation abating, he cautioned against declaring the battle over: “I’m not prepared to assert that we are out of the woods.”

This uncertainty, coupled with concerns about China’s decelerating economy, has cast a pall over investor sentiment. After experiencing a bull-market rally during the first half of the year, the S&P 500 has plummeted by over 3 percent this month, while the tech-laden Nasdaq has tumbled by 5 percent over the same period.

Bonds have been on an even more tumultuous roller-coaster ride. The real yield on inflation-adjusted 10-year Treasury notes surged to a 14-year high this week, as investors rushed to divest from long-dated bonds. (Bond yields climb when bond prices fall.) Escalating yields have a tendency to amplify borrowing costs for corporations and prospective home buyers, thus exerting a dampening effect on economic expansion. Alarming signs continue to emerge; U.S. home builder confidence witnessed its first decline of the year this month.

Concerns of an impending recession are still prevalent. Bank of America’s latest survey of global fund managers, released on Tuesday, bore the headline “the least bearish” sentiment since February 2022—just before the Fed embarked on its interest rate tightening cycle. However, the survey also indicated that only four out of ten fund managers considered a recession to be “unlikely.”

 

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