Federal Reserve steps to the side

The Federal Reserve released its meeting minutes during the trading session on Wednesday, something that would have been anticipated by quite a few traders out there. Ultimately, this is a market moving event that ended up showing little reaction, which was a bit surprising considering the way that the markets had led up to the release.

Wednesday action before the announcement

At 2 PM Eastern Standard Time, the FOMC release the minutes that so many people have been waiting for. It was from the January 29-30 meeting that seem to signal complete turnaround in attitude. Leading up to the release, the US dollar had fallen against the Euro, the British pound, the Swiss franc, and a whole host of other currencies. It looked as if money was flowing from left to right across the Atlantic Ocean. Beyond that, the stock market had started reaching rather significantly higher towards the major resistance barrier that they all started to see overhead. For example, the S&P 500 reached towards the 2800 level but simply could not crack it.

As the announcement came out, markets went back and forth, essentially giving back some of the gains against the greenback, as the Federal Reserve was a little bit less dramatic and interesting then people had thought.

Highlights

With the statement, FOMC members noted that tightening financial conditions became a bit of an uncertainty surrounding the financial markets as the balance sheet runoff continues. After all, the Federal Reserve is starting to roll off quite a bit of its balance sheet, and that of course has caused a bit of a temper tantrum in the marketplace.

The participants of the FOMC started to see softness in core and total inflation, which of course is a reason to be very patient about monetary policy as inflation is by far one of their most important indicators. With that in mind, participants in the FOMC favored keeping a “patient approach to observe effects of past rate hikes.”

Beyond that, participants decided not to an express and overall judgment on the balance of risks given the degree of uncertainty around the outlook of global markets, as we not only have concerns about inflation, and beyond that we have seen quite a bit of volatility in financial markets. The uncertainty around politics of course continues to be an issue as well, so sitting on the sidelines will more than likely be the attitude of FOMC members in the interim.

The FOMC members also agreed that it was important to be flexible on balance sheet normalization, one of the biggest problems Wall Street has had as of late, as it is a form of monetary tightening. They also suggested that being flexible met that balance sheet normalization could be adjusted if needed. This does give a bit of a softening effect on monetary policy. A huge majority of participants at the FOMC thought it was a desirable outcome to announce in the near term a plan to stop reducing the Federal Reserve’s asset holdings this year.

Markets chop afterwards

The announcement did very little to change things as a turndown. This was essentially a “dud” when it comes to market volatility. The US dollar chop back and forth against most currencies, essentially ending the day relatively unchanged. Beyond that, the S&P 500 also chomped around in a relatively unchanged choppiness after the release. We continue to see a lot of selling pressure above, and I think it’s only a matter of time before we roll over considering that the softer attitude didn’t do enough to push a break out. The treasury market in the United States saw yields rise slightly.

US/China trade talks

During the week, the Americans are discussing things with the Chinese when it comes to the trade war, and that seems to be the next major mover of markets. Quite frankly, there is a lot out there that could disappoint, so  it’s only a matter of time before we react to those headlines as well. In the meantime, the market looks as if it still doesn’t know what to do with the new information.