Comments from Fed vice-chair Brainard about a more-aggressive pace of hikes and rapid balance sheet rundown (though conditional) sparked a jump in the US dollar yesterday and that sentiment is continuing to percolate today.
That move highlights the intense focus on interest rates and the Fed at the moment and it's why the 2 pm ET FOMC minutes will be an event to watch closely.
Fixed income strategists at BMO write:
The two areas of interest are 1) how close was the Fed to 50 bp last month; the logic for more will be rolled forward to May’s meeting and 2) and details on the pace and composition of reducing SOMA holdings [the Fed's balance sheet]
The market is currently pricing in an 82% chance of a 50 bps hike, up 10 percentage points from pre-Brainard.
On the balance sheet, BMO highlights the risk of "an even more aggressive baseline in terms of how the Committee will endeavor to run own the balance sheet."
Importantly, the minutes are now released at the same time for everyone on the FOMC website rather than via media lockup. That leads to a sloppy, jumbled interpretation as traders race to read the headlines and interpret the overall message. In turn, the underlying meaning and context of comments can be skewed by headlines or a misguided focus.
Ultimately, perception is reality when it comes to things like these so they can extend. In my experience though, market moves on the Fed minutes tend to unravel the following day.
