Fed Signals Potential Rate Cut: FOMC Minutes Reveal

The Federal Open Market Committee (FOMC) seems poised for an interest rate cut in September, according to minutes from their July 30-31 meeting released on Wednesday. The minutes revealed that most officials expect such a move, with some policymakers even indicating readiness to lower borrowing costs during the July meeting itself. This news likely bolstered market sentiment, as anticipation of lower interest rates often leads to increased stock market activity and higher bond prices.

The institution kept the benchmark interest rate at 5.25%–5.50% on July 31. However, Fed signalled the possibility of a rate-cut at the upcoming September 17-18 meeting.

Financial markets have anticipated that the Federal Reserve’s September meeting will begin policy easing. Therefore, they are expecting a full percentage point of the Fed rate-cut by year-end.

According to the minutes from the July meeting, most policymakers believed that if economic data met expectations, easing policy at the next meeting would be appropriate.

Many Fed officials considered the current rate levels restrictive. Additionally, some argued that with inflation pressures easing, maintaining these rates could further slow down economic activity.

The minutes indicated that a “majority” of Fed officials perceive increased risks to the job market, while risks to the inflation target have diminished. Current joblessness exceeds the 4% rate projected by Fed officials for this year and the 4.2% forecast for the end of next year.

Powell’s Jackson Hole Speech and Jobs Report Awaited

Markets had a muted response to the minutes’ release, with stocks making slight gains and bond yields decreasing. Fed funds futures showed a minor reduction in the likelihood of a quarter-percentage point cut for the September meeting, while the chances of a half-percentage-point reduction increased slightly.

Chairman Powell hinted at the Fed rate-cut following the July policy meeting, stating that “if we receive the data we anticipate, a reduction in our policy rate might be considered at the September meeting.”

Concerns about the job market may be influenced by the Labour Department’s update on Wednesday, which revealed that there were 818,000 fewer payroll jobs in March than initially reported. This adjustment was part of the annual benchmark revision process.

Investors can expect an update on Powell’s perspective when he addresses the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming, on Friday. Other Fed officials are also anticipated to share their views on the economic outlook during the conference.

Another key moment for monetary policy will be in early September with the release of the US Labour Department’s employment report for August.

Global Stocks Approach Record Highs

After a global stock pause on Wednesday, a sustained rally pushed them close to recent record highs. Signals from the Federal Reserve regarding potential interest rate cuts heavily influence rates of all industries. Let’s take a look at the most significant ones:

Oil prices held steady following a series of declines. These recent drops were caused by anticipated lower demand from China. Meanwhile, the weakening USD, due to expected Fed rate-cuts, kept gold prices near Tuesday’s all-time high.

On Wall Street, the Dow edged up by 0.03% to 40,847.55. The S&P 500 increased by 0.28% to 5,612.60. Besides, the Nasdaq Composite rose by 0.34% to 17,877.54.

The Tokyo’s Nikkei 225 ended the day with a decline of 0.3%, closing at 37,951.80. This drop came as investors weighed concerns over global economic growth.

Leading the gains was Mercari Inc. (TYO: 4385), whose shares surged 7.56% or 167.00 points, closing at 2,377.00.
Sumitomo Dainippon Pharma Co Ltd. (TYO: 4506) saw its stock rise 6.71% or 41.00 points, ending the session at 652.00.
IHI Corp. (TYO:7013) rounded out the top performers with a 5.90% increase, adding 328.00 points to finish at 5,891.00.

JGB Yields Edge Up as BOJ Faces Market Volatility

The yield on the 10-year Japanese Government Bonds (JGB) increased slightly by 0.5 basis points. It reached 0.87% as of 0415 GMT. At the same time, 10-year JGB futures dropped by 0.14 to 144.84 JPY.

Market observers are keen to see if Governor Ueda will adjust his aggressive stance in light of recent market volatility, according to Yurie Suzuki, a market analyst at Mizuho Securities.

Suzuki noted the prevailing uncertainty and highlighted the challenges of making decisions under these conditions.

The Bank of Japan’s (BOJ) shift towards a more hawkish policy has contributed to the largest single-day decline in Japanese stocks since the Black Monday crash of 1987.

Suzuki also mentioned that some investors are reconsidering the possibility of another interest rate hike in Japan this year, following the BOJ’s recent research papers. These papers argue that increasing rates progressively is necessary due to growing inflationary pressures.

Shorter-term Japanese Government Bonds saw slight yield increases. The two-year JGB yield edged up 1.5 basis points, reaching 0.36%. Concurrently, the five-year yield inched higher by 1 basis point to 0.485%.

Meanwhile, yields on longer-term Japanese government bonds showed stability. The 20-year JGB yield held its ground at 1.7%, while the 30-year JGB yield remained constant at 2.08%.

Fed Rate-Cut: Final Thoughts

The potential for a Fed rate-cut in September, as signaled by the FOMC minutes, has significant implications for global financial markets. While this news has generally bolstered market sentiment, it comes amid concerns about job market risks and ongoing economic uncertainties. The upcoming Jackson Hole conference and August employment report will be crucial in shaping expectations for monetary policy.

Meanwhile, global stocks are approaching record highs, and the Bank of Japan faces its own challenges with market volatility. As always, investors and policymakers alike must navigate a complex and interconnected global economic landscape, balancing growth concerns with inflationary pressures and market stability.

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