The market ignored the Fed protocol published yesterday and such a reaction of traders was very expected given the certain obsolescence of this document. Regulator members in their statements substantiated the July rate cut. According to most of them, this step will help inflationary growth and prevent a reduction in business investment. Members of the Fed associate the latter factor with the consequences of a trade war between the US and China, which "is unlikely to be completed in the near future." It is worth noting here that the uncertainty in this matter only increased for the past three weeks, after the end of the July meeting. This is an important point since the growth of macroeconomic statistics can be offset by a trade conflict in the context of the regulator's further steps to mitigate monetary policy parameters.
Fed members are also worried about the "continued finding of inflation rates below inflation targets." In their opinion, this factor reduces inflationary expectations. Although in the past few years, inflation has typically exceeded the two percent long-term goal. June inflation really disappointed the market, however, July figures were in the green zone ahead of forecast values. Thus, the general consumer price index showed good dynamics, rising to 1.8% in annual terms with a forecast of growth of up to 1.7% and to the level of 0.3% on a monthly basis. But core inflation, excluding food and energy prices, showed more significant growth. In monthly terms, the indicator grew to 0.3% and in annual terms, it jumped to 2.2%, which is the strongest growth rate in the last 6 months.
The labor cost index also increased. According to experts, the Fed members track this inflation indicator with a "special predilection". Hence, its dynamics have a significant impact on the dollar. In the first quarter of this year, it collapsed to -1.6% but turned out to be much better in the second quarter, reaching 2.4% than the expected forecasted increase to 1.7%. This indicator allows us to estimate the growth rate of the level of wages in the United States and accordingly, it is a good indicator of inflationary pressure in the country. I note that all the above figures were published after the July meeting. Hence, the voiced comments should be considered in the context of these releases.
Another issue that has raised concerns among Fed members is the inverse of the yield curve. Let me remind you that this fact seriously alarmed market participants since similar trends were observed in anticipation of the 2008 crisis. In addition, the inversion of the curve preceded almost all recessions in the States over the past seven decades, only in the mid-sixties the signal was false. But even then, the US economy slowed down significantly. However, members of the Committee do not panic about this. In their opinion, low profitability is a "potential source of risk", but such risks "do not look high" at the moment. Judging by the rhetoric of the protocol, Fed officials were more concerned about the high level of corporate debt and lending volumes. According to regulators, these factors create "certain risks" for Fed forecasts.
Thus, many theses of the Fed protocol published yesterday really look outdated. Key macroeconomic indicators have recently shown growth, although most of them came out after the July meeting. Indicators such as Retail sales, inflation, consumer confidence, average hourly wage growth and US GDP have recently shown positive dynamics, reflecting the growth of the US economy. On the other hand, Fed members are still concerned about the trade conflict between the United States and China, and more precisely, the consequences of this conflict. Business investment and factory production have recently continued to weaken amid unrest over the prospects for trade relations between the two superpowers. Some factors (besides the US-China conflict) could potentially weaken the business of investing in fixed assets even further. In particular, we are talking about "hard" Brexit and/or geopolitical tensions in the Far East. That is, if the unrest in Hong Kong leads to China's military intervention and the risks of implementing this option have recently increased.
To summarize, it is worth noting that the Fed protocol has not changed market expectations. Traders still admit the probability of interest rate cuts at one of the autumn meetings and in the first half of next year. As of July 31, the Fed considered interest rate cuts a "correction" in the middle of the cycle. It is entirely possible that regulator members will come to the conclusion that the 25-point adjustment does not adequately reflect the existing risks, primarily the geopolitical plan. At least recent events increase the likelihood of such a scenario.
The EUR/USD pair actually ignored yesterday's release, continuing to trade in a given price range. The market is waiting for the main event of this week - a speech by Fed Chairman Jerome Powell, which will be held tomorrow, during the American session. His rhetoric will allow EUR/USD traders to exit the price range, either to the base of the 10th figure with testing the support level of 1.0980 or to the borders of the 12th figure.
