What Markets Are Doing After Today's FOMC Meeting Minutes Release

The three major indexes all dropped in unison shortly after the release of the minutes from the U.S. Federal Reserve's July Federal Open Market Committee (FOMC) meeting, reflecting Fed sentiment that accommodative monetary policy could end sooner than expected if improvements continue in the labor market
Dow moves after today's FOMC meeting

At 2:15 p.m. EDT, the S&P 500 dropped 4.13 points, the Dow Jones Industrial Average lost 32.99 points, and the Nasdaq fell 7.66 points, all before the three major indexes began to rise again.

While the Fed made no remarks on an explicit timetable for interest rate hikes, which is what the markets are observing attentively, the minutes did indicate that the situation in the labor market was looking healthier and improving quicker than expected.

The minutes also showed that many FOMC members said "it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated" if the economic conditions they monitor begin to converge on their targets.

There also seemed to be language to suggest that inflation would begin to pick up without being derailed by disinflation, as "most now judged that the downside risks to inflation had diminished," as well as many members believing "risks of inflation running persistently below their objective as having diminished somewhat."

Here's what the Fed's agenda will be for the rest of the year...

The Fed's Charted Course for Monetary Policy

As the Fed's playbook stands now, there will be a $25 billion monthly purchase of agency mortgage-backed securities (MBS) and long-term treasuries until the September meeting, when that number will be tapered to $15 billion. And, as minutes from June's meetings suggest, that last $15 billion will be cut and the policy of quantitative easing will end after the meeting on October 29.

The policy of bond buying began in September 2012 as a way to put downward pressure on long-term interest rates and pour more money into the markets at a time when the U.S. economy needed a quick boost amid a slow-growing, post-recessionary period. It began as a monthly purchase of $45 billion in treasuries, and $40 billion in agency MBS, for a total of $85 billion in total asset purchases.

It wasn't until December 2013 that former Fed Chairman Ben Bernanke announced that this stimulative policy would begin winding down with a $10 billion reduction in these purchases. With every Fed meeting to follow, another $10 billion would be cut from the purchases until the program was ended altogether.

The only change to that script came in the minutes from June's meeting, which revealed that rather than cut $10 billion in October's meeting and continue purchasing $5 billion worth of assets every month until a final round of reductions came at the end of the December meeting, the Fed would just cut the final $15 billion after the October meeting.

All in all, the announcements out of the Fed have been predictable, and current Fed chairwoman Janet Yellen has continued to follow the same path that her predecessor Bernanke handed her when he departed from the post in February.

But even the predictable Fed talk can be felt on Wall Street...

How Fed Minutes Move Markets

How FOMC Meeting Minutes Move MarketsFedspeak, no matter how dry and technical, has the ability to move markets because it gives hints as to what the country's long-term monetary outlook will be.

Even on days when positive economic news is released, the major indexes won't move until given direction from the Fed. This happened before the meeting on July 30, when the S&P 500 was down as much as 7.53 points before the FOMC released a statement, despite news of optimistic economic growth expectations. Within an hour of the Fed statement, the S&P advanced 4.56 points.

"The actual numbers are just the latest figures to come out and we always know there's that next round of numbers," Clifford Rossi, executive-in-residence and professor of the practice at the University of Maryland's Robert H. Smith School of Business, told Money Morning. "The Fed is taking this big-picture, long-term view."

While today is not the day of an actual FOMC meeting, Fed policy dictates that the minutes from each meeting be released three weeks after. Today's minutes were from the July 30 meeting.

The release of these minutes tends to reiterate Fed policy to the markets, which has been dovish as of late. The Fed has yet to announce when it expects there to be interest rate hikes from their near-zero levels, or when the central bank will begin offloading the more than $4 trillion of assets it has on its balance sheet.

So far this year, on dates when the Fed releases minutes the S&P has moved an average of 8.13 points or 0.2% on the day. While on average this is almost negligible, the S&P's 7th biggest one-day advance on the year of 1.09% came on April 9, the day of a Fed minutes release.

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