The US stock market is closed today in celebration of the Thanksgiving holiday. Once again, the seasonality of this time of the year kicked in, spurred by a dovish FOMC Minutes statement.
Any dovish statement at this point is bullish for US stocks. As such, it is no wonder that stocks rallied on the release, and the US dollar tanked.
By dovish, it means that the Fed plans to slow down the pace of its rate increases. It should not surprise anyone, given that inflation has cooled off (at least judging by the latest CPI report) and that the Fed is now losing money on the securities it purchased in 2020-2021, given how fast it raised rates this year.
Here are the main takeaways from yesterday’s FOMC Minutes that pushed stocks higher:
The majority of FOMC members favor a slowdown in the pace of rate rises
Some members considered that easing supply constraints should lead to lower inflation in the medium term
A substantial majority of FOMC members favor a slowdown in rate hikes
2022 was all about rate the Fed hiking the interest rates. It did so in such an aggressive way that the rise of the US dollar inflicted pain in most other economies – especially in emerging markets.
But yesterday, the Fed signaled a slowdown in rate hikes would likely be appropriate soon. As a result, stocks jumped, and the US dollar dived, although the moves’ amplitude was not ordinary.
FOMC minutes: Against this “substantial majority” that favored dialing down the pace of rate rises were a “few” who thought “it could be advantageous to wait until the stance of policy was more clearly in restrictive territory” pic.twitter.com/KLrrvjCgX5
— Nick Timiraos (@NickTimiraos) November 23, 2022
Nevertheless, out of the 12-page FOMC Minutes statement released yesterday, this was the main outcome. Hence, investors should expect a dovish Fed moving forward and we should not rule out the December meeting as one when the Fed chooses to hike less than the markets have previously thought.
Lower inflation expected in the medium term
Inflation was stubbornly high in 2022 and was the leading cause of the Fed tightening financial conditions. This is because the Fed has a dual mandate, one of price stability (i.e., inflation around 2%) and maximum employment.
While the job market remained resilient and robust, inflation kept pushing the Fed towards higher hiking rates. However, at this point, some members of the Fed expect lower inflation in the medium term as supply constraints ease.
All in all, yesterday’s FOMC Minutes were bullish for the stock market. If the Fed delivers a similar message at its December meeting, the bullish momentum for US stocks should continue.
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