Tomorrow could be the most important day for the markets this week, because of the early release of the FOMC minutes. Normally they are made public on a Wednesday, but due to the markets being closed for Thanksgiving on Thursday, they will come out a day early. Lately, the recount of what happened at the last Fed meeting has had a habit of shaking up the markets.

The thing is, the markets might have gotten a little ahead of themselves after the last meeting. Remember that the FOMC decided to hold rates unchanged, and then the message from Fed Chair Jerome Powell was interpreted as largely dovish. The markets became convinced there wouldn’t be another rate hike, because he seemed very cautious about the economic outlook.

Building on the Rate Narrative

After that, the jobs numbers and then the inflation figures fit neatly into expectations that the economy was cooling and inflation would come down faster than expected. This increased confidence in the idea that not only would there be no more hikes, but that the Fed would move to cut rates relatively soon.

In response to that speculation, the stock market has rocketed higher and the dollar has weakened. The risk-on sentiment has permeated most of the markets, and it leaves them vulnerable to a correction if the Fed doesn’t deliver on the dovish interpretation. And we have to remember that for a long time now, the market has been wrong in its assumptions that the Fed will turn more dovish.

How Dovish Is the Market?

At the current assessment, the market is pricing in a 100% chance of no change in the policy for the next two meetings. That means no final rate hike, which the Fed has so far not closed the door on. Then, the market is pricing in an over 50% chance that the first rate cut will happen in May of next year, subsequently pricing in a total of 100bps of cuts for the whole of 2024. That means there would be four cuts spaced over the last three quarters of the year.

So far, the Fed has heavily implied that rates will stay at the current level (or higher, assuming a final hike) for the whole of next year. That’s significantly more hawkish than the market has priced in. In other words, there is a good chance that the Fed could disappoint when the minutes come out, and “correct” or “pullback” on the dovishness that has been inspiring the risk-on movement this month.

What to Look Out For

The statement that came out with the rate decision last time was pretty much unchanged from the previous one. The only difference was an inclusion of talk about being cautious around the economic outlook. In other words, the views of the FOMC members seemed to have not changed much from the prior meeting, in which it was generally expected that rate cuts were far off. So, if the minutes show primarily concern about prices and the jobs market, with little mention of the economic forecast, then it could be seen as overly hawkish.

The more the FOMC expressed concern about the slowing economy, or there was talk about how high yields were equivalent to a rate hike, the markets will likely interpret it as dovish. This could keep the dollar from appreciating and buoy stocks. But investors might be extra warry of taking on risk ahead of the long weekend.

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