Has the stock market “misinterpreted” the Fed again? What strategists say about the reaction to the July minutes

Minutes from the Federal Reserve’s meeting in July – where policymakers raised the benchmark interest rate by 75 basis points – indicate that stock market participants were too quick to assess a “less warmonger,” some strategists argued on Wednesday.

Federal Reserve officials agreed in July that it was necessary to move their benchmark interest rate high enough to slow the economy in order to combat more sticky inflation, according to the minutes of the July 26-27 Federal Open Market Committee meeting released Wednesday.

Fed officials agreed that “moving to a sufficiently restrictive policy stance was essential to avoid an unanchoring of inflation expectations”, while some indicated that the policy rate should reach a level “sufficiently restrictive” to ensure that inflation is firmly on track. back to 2% and maintain that level for a while.

The minutes, however, also showed that “many officials” said they were concerned about the risk that the Fed could tighten monetary policy stance more than necessary.

US stocks ended lower on Wednesday after paring losses. The S&P 500
SPX,
-0.72%

fell 31.16 points, or 0.7%, to end at 4,274.04. The Dow Jones Industrial Average
DJIA,
-0.50%

snapped a five-day winning streak, dropping 171.69 points, or 0.5%, to end at 33,980.32, after dropping 324 points to a session low. The Nasdaq Composite
COMP,
-1.25%

fell 164.43 points, or 1.3%, closing at 12,938.12.

As investors parsed the meeting summary, Citi economists argued that instead of suggesting more dovish policy, the minutes were merely “calls to remain data-dependent in an uncertain environment and rapidly evolving”.

“July’s FOMC Minutes were broadly balanced, reflecting a committee that was concerned about providing too little restraint to lower inflation, but also concerned that it was too tight, resulting in an unnecessarily growth outcome. negative,” said Citi economists Andrew Hollenhorst and Veronica. Clark in a note. “Following the meeting, stronger activity data, persistently high price and wage inflation, and looser financial conditions suggest that Chairman Powell will once again find himself making a hawkish effort to maintain the minutes of “resolve” and “credibility” indicate that the committee intends to reflect through their actions “strong politics”.

See: The stock market rally faces a major challenge to the S&P 500’s 200-day moving average

David Petrosinelli, a senior trader at InspereX in New York, also argued that investors were overly optimistic and misinterpreted the minutes.

“It surely wouldn’t be the first time the general market had misinterpreted the minutes… The perception that it was less hawkish, but that’s not what I read when I read the minutes .” Petrosinelli told MarketWatch in a phone interview Wednesday. “I just think at the end of the day the Fed knows they have an inflation problem. they will get there.

See: Stock bear market is ‘incomplete’, Morgan Stanley’s Mike Wilson warns

US stocks rebounded from their mid-June lows, with the Nasdaq Composite exiting the bear market last week, while the Dow Jones Industrial Average and S&P 500 also saw renewed upward momentum. Still, strategists said the market’s upbeat reaction to President Powell’s July press conference and July economic reports was premature.

“I don’t think we’re out of the woods yet. We believe a recovery in technology was hopeful and that we are nearing the end of the interest rate tightening cycle,” Andy Tepper, managing director of BNY Mellon Wealth Management, said by telephone. “Quite frankly, we think it may be a bit premature, that there is still worrisome, stickier inflation that the Federal Reserve has to deal with.”

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