Has the Fed ‘Misinterpreted’ Stock Market Again? What strategists say about the reaction to the July minutes

Minutes from the Federal Reserve’s July meeting — at which policymakers raised benchmark interest rates by 75 basis points — indicate that stock market participants were pricing in a “less aggressive” policy outlook too quickly, some strategists argued Wednesday.

Federal Reserve officials agreed in July that it was necessary to raise their benchmark interest rates high enough to slow the economy to combat stickier inflation, according to the minutes of the July 26-27 meeting of the Federal Open. Market Committee released on Wednesday.

Fed officials agreed that “moving to appropriately restrictive policies was essential to avoid loosening inflation expectations,” while some indicated that key rates would need to reach “sufficiently restrictive” levels to ensure inflation remains firm. is on its way back to 2 percent and will remain at that level for some time to come.

However, the minutes also revealed that “many officials” said they were concerned about the risk that the Fed could tighten monetary policy more than necessary.

US stocks closed lower on Wednesday after cutting losses. The S&P 500 SPX,
-0.72%
fell by 31.16 points, or 0.7%, to end at 4,274.04. The Dow Jones Industrial Average DJIA,
-0.50%
broke a five-day winning streak, falling 171.69 points, or 0.5%, to finish at 33,980.32, after dropping 324 points at the lowest point of the session. The Nasdaq Composite COMP,
-1.25%
fell 164.43 points, or 1.3%, to close at 12,938.12.

As investors parsed the meeting summary, economists at Citi argued that the minutes were not so much suggestive of a more moderate policy, but merely “calls to remain data-dependent in an uncertain and rapidly evolving environment.”

“The July FOMC minutes were broadly balanced, reflecting a committee worried they would impose too few restrictions to curb inflation, but also concerned that they could tighten by too much, which would lead to an unnecessarily negative growth outcome,” said Citi economists Andrew Hollenhorst and Veronica. Clark in a note. “After the meeting, stronger activity data, worryingly high and ongoing wage and price inflation and easing financial conditions indicate that Chairman Powell will make another aggressive move to maintain the ‘dissolve’ and ‘credibility’ minutes, indicating that the committee intends to reflect through their ‘vigorous policy’ actions.”

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David Petrosinelli, a senior trader at InspereX in New York, also argued that investors were over-optimistic and misinterpreting the minutes.

“This certainly wouldn’t be the first time the general market misinterpreted the minutes… The perception that this was less aggressive, but that’s not what I read when I read the minutes.” Petrosinelli told MarketWatch in a telephone interview on Wednesday. “I think ultimately the Fed knows they have an inflation problem. I think they know they are a long way from being restrictive on rates, and I think they will get there.”

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US stocks have recovered from their mid-June low, with the Nasdaq Composite exiting bear market territory last week, while the Dow Jones Industrial Average and S&P 500 also experienced renewed upward momentum. Still, strategists said the market’s optimistic response to Chairman Powell’s press conference in July and the July economic reports was premature.

“I don’t think we’re out of the woods yet. We believe that an uptick in technology has been hopeful and that we are nearing the end of the rate-cutting cycle,” Andy Tepper, CEO of BNY Mellon Wealth Management, said over the phone. “Honestly, we think that might be a little premature, that there’s still some worrying, stickier inflation that the Federal Reserve is dealing with.”

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