The FOMC minutes released today have further dampened, though certainly not killed, the possibility that the Fed will choose to raise the Fed Funds rate in April. While some committee members believed raising the rate would send an unwarranted message of urgency and was imprudent against global risks; worrying that global headwinds could slow U.S. exports. Others believed that April may be the correct time for that next rate increase should economic data come in as expected.
Janet Yellen, the Fed Chairwoman, has previously relayed an important statement included in the FOMC minutes: downside risks are substantial should rates be risen too quickly in the current environment, possibly causing the U.S. to slip into recession while interest rates are still too low for the Fed to use them as a tool to fight off the downturn. On the other hand, if rates are risen too slowly, the negative effects can be more easily subdued from further rate hikes in the future. In other words, with the Fed Funds rates already so low, the FOMC would rather have to raise it quickly than have to find a way to fend off a recession with near-zero rates.
The overall feel of the minutes was a belief that interest rates would not be raised unless economic data was surprisingly stronger than expected. With the Fed's focus on transparency to avoid spooking financial markets, I take this to mean that the FOMC should not be expected to raise rates in April. If that changes, it will be known before the meeting through statements made by FOMC members.
What All of This Means for the Markets
Obviously, bond markets will be affected by any information related to future interest rates. Bonds took the minutes as a signal that interest rates will be higher than previously expected over the next 2-30 years, as shown by Treasury yields which rose for all of the related periods between 0.02% and 0.04%. The yield only fell for 6-month T-Bills by 0.01%, signalling that markets interpreted the minutes as saying that interest rates would stay lower over that time period. This is consistent with the revised median estimate of 2 instead of 4 rate hikes this year. Expect bond markets to be especially sensitive to surprises in economic data before the April FOMC meeting.
In a paper released by the New York Fed, they discussed findings about how financial markets reacted to the release of FOMC minutes. Not surprisingly, markets experience heightened volatility after a release; although this effect has been decreasing since 2008 supposedly due to greater transparency from the Fed. Nonetheless, volatility is still much higher after the release, and this can be an opportunity to day traders, who depend on volatility to make money, but is probably a bad time for inexperienced investors to be involved in market transactions.
Markets have fully adjusted to the FOMC minutes after about an hour and a half. Before this time, you may have an opportunity to profit if you can figure out which way the markets will react.
Lower interest rates are almost always good for the stock market, and this appears to be especially true at the moment. The stock market declined significantly after the December rate hike, and many (myself included) believe this is do to higher rates deflating bubbling stock market as well as making other types of investments more attractive. The stock market has remained very sensitive to any hint that a rate rise may be imminent. Expect that markets may decline whenever a rate hike seems probable; such as after strong inflation-related data or statements from FOMC members.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.