Fed minutes: Could provide a hint at the timing of a rate hike

The Fed July meeting minutes are scheduled for release later today. The central bank had offered a jobs clue with regards to the timing of the rate hike in its July statement. The statement said the interest rate hike could happen after “some further improvement in the labor market.”

Major events since July Fed meet

• July NFP print showed “some further improvement in the labor market”, wage pay ticked up
• CNY devaluation followed by a slightly dovish tilt from the ECB and BOJ
• Chinese stock markets stay volatile with negative bias
• Sell-off in crude prices, base metals sold to multi year lows.
• Third bailout for Greece approved by the German parliament

As per the jobs cue in the policy statement, the labor market in July did witness “some further” improvement. The CNY devaluation shock appears to have played itself out and the commonly assumed 10% fall in CNY is unlikely in the short-term. Consequently, the retaliatory action by other central bankers is unlikely to be anything more than few dovish words. Meanwhile, the Chinese government and the regulators are doing their bit to stabilize the equity market – at least in the short-term. Greece is out of the way for now as well. 

Fed to follow Taper model?

Thus, doors appear open for the indication of a rate hike. Moreover, if the rate hike has to happen, either in September or December, the Fed is likely to provide a clear hint with just one month away from the September meeting. Back in 2013, Fed had pretty much indicated a possibility of first QE taper happening in the September meeting in June 2013 itself. In response the markets had priced-in the move in advance by sending the USD higher, especially against EM and current account deficit economies across the globe, only to see Fed delay the taper to December meet. The move resulted in the sharp unwinding of dollar longs on September 17th followed by a little or no negative reaction when first taper was actually initiated in December 2013. 

On similar lines, the Fed could prop up expectations of a September rate hike today, which could trigger a final leg up in the USD. Whether or not the Fed hikes in September remains to be seen as it depends on how markets react to the rate hike hint and how situation in China unfolds. 

Moreover, the markets are yet to price-in a clear rate hike hint and hence the Fed through minutes could throw light on the exact timing of the rate hike today, especially since the situation in Greece and China is under control at the moment. The hint could be explicit - reference to September or December or indirect – very little focus on China and overseas turbulence and more emphasis on domestic labor market strength.