Finally strong hint of FED slowdown on rate hikes

Minutes of the U.S. Federal Reserve's last meeting also showed a "substantial majority" of Fed policymakers agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes.

“The FOMC minutes reveal a surprisingly strong dovish tendency on the committee as well as at the staff level. There is widespread agreement within the committee to slow the pace of rates hikes -- a view championed by Vice chairwoman Lael Brainard, in our view -- but little conviction on how high rates should go.”

-- Anna Wong, chief US economist

Has the rate pivot begun? A Fed pivot occurs when the Federal Reserve, which is the U.S. central bank, reverses its policy outlook and changes course. Therefore, less aggressive interest hikes in the near term and then a reversal on the cost of borrowing. Last time we got some decent news, the markets reacted very favourably, bouncing from months lows, the USD weakened, supporting commodities.

"In all, it is clear from the minutes that FOMC participants are determined to further raise the policy rate in the face of a very tight labour market and unacceptably high inflation," said analysts at Barclays.

"However, the minutes also reveal an emerging divergence of views among members about the peak rate, and uncertainty about the peak rate."

The futures market implies a 76% chance of a rise of 50 basis points to 4.25%-4.5% at the December meeting, while a majority of investors expect the target U.S. federal funds rate will peak above 5% by next May.

Market reaction on last nights FED minutes

World equities rose while U.S. Treasury yields retreated on Wednesday after minutes of the Federal Reserve's latest policy meeting showed U.S. central bankers looking to soon moderate the pace of interest rate hikes.

A "substantial majority" of Fed policymakers agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes, the meeting minutes showed. Traders had expected the Fed minutes would affirm officials' softening stance after recent data showed a moderation in economic conditions.

On Wall Street, all three major indexes closed higher, led by gains in technology, consumer discretionary, communications, healthcare and industrial stocks.

The U.S. dollar fell across the board after the Fed minutes. The dollar index fell 0.915%.

What else did the minute reveal?

Since the November gathering, economic data have shown modest growth with some signs of slowing inflation amid still strong demand for labor. Employers added 261,000 jobs last month and the unemployment rate rose slightly to 3.7%, though it remains very low on a historic basis.

Financial conditions have also eased since the early November rate increase, with lower yields on government 10-year notes and higher US equity markets.

“The big picture remains in our view that the Fed intends to slow down in order to allow more time for lags to operate and cumulative tightening to date to show up in the data,” Evercore ISI’s head of central bank strategy Krishna Guha wrote in a note to clients. “The hawkish talk from Powell in the press conference and many Fed officials subsequently is intended to provide air cover for the slowing to take place without an excessive easing of financial conditions.”

The US Dollar index, as a consequence, has fallen below 106.00, the lowest since mid-August, as traders raise bets of only a 50 bps rate hike by the Fed in December. 138.50 is targeted to the downside for the immediate future.

Gold upside opens up toward $1,775 on dovish Fed pivot

Gold price is trading at the best levels seen so far this week, as bulls find fresh impetus after having recaptured the $1,750 psychological mark. The main reason behind the renewed upside in the bright metal is the extended US Dollar weakness in tandem with the US Treasury bond yields.

Gold price at time of writing.

Today is Thanksgiving in the USA but the world has already reacted to the FED minutes.

A gauge of global stocks headed for the highest level in more than two months on Thursday and the dollar fell after Federal Reserve meeting minutes showed support for tapering interest-rate increases.

Japanese, South Korean and Australian equities benchmarks advanced while Chinese gauges fluctuated. US futures climbed after the S&P 500 closed at a two-month high Wednesday before the Thanksgiving holiday.

Government bond yields edged lower in Australia and New Zealand after Treasury yields fell Wednesday along with the dollar. A gauge of the greenback slid further Thursday to levels not seen since August on a closing price basis. There will be no trading in Treasuries due to the US holiday.

Key events this week:

  • ECB publishes account of its October policy meeting, Thursday

  • US stock and bond markets are closed for the Thanksgiving holiday, Thursday

  • US stock and bond markets close early, Friday

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