Explained | Why do Fed minutes matter and why do investors track them?

Federal Reserve officials dissented on the necessity for further increases in benchmark interest rates in the latest scheduled review of the Federal Open Market Committee (FOMC), according to official minutes of the meeting released on Wednesday.

In the latest meeting, held on July 25-26, Fed officials expressed concerns about the potential negative impacts on the US economy if rates were raised excessively, even as the majority of policymakers remained focused on their primary objective of taming sticky inflation.

Have you ever wondered why these Fed minutes matter? What do Fed minutes contain that the policy statement, released after each scheduled meeting of its officials, doesn’t?

Minutes of each review conducted by the FOMC — the US central bank’s benchmark interest rate-deciding panel headed by the Fed Chairman — is an essential piece of communication from the Fed that details the rationale behind its decision at a review along with transcripts of key remarks by policymakers. The minutes also offer details about the process behind certain policy action.

How frequently does the Fed review its monetary policy?

The Federal Reserve—the US central bank more commonly known as the Fed — conducts eight reviews of its monetary policy every year, which simply means one review every six weeks. The frequency of its policy reviews is slightly higher than the Reserve Bank of India — the Indian central bank, which conducts six bi-monthly reviews a year.

What’s the frequency of the release of FOMC minutes?

The Fed releases minutes of each scheduled review roughly about three weeks after releasing the statement.

First things first, what does the Federal Reserve, more commonly referred to as the Fed, really do?

It is responsible for the monetary policy of the US economy —  precisely regulating the supply and flow of money in the American financial system, setting benchmark interest rates and regulating financial markets.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve that determines the course of monetary policy, including decisions related to interest rates and other economic measures.

Now why are FOMC minutes tracked closely?

The FOMC minutes often leave clues on the longer-term plan of Fed officials that are used to form a forward-looking view about the financial markets as well as the economy.

Investors and economists carefully study the minutes for hints regarding the outcome of upcoming interest rate decisions because they provide detailed insights into the FOMC's position on monetary policy.

All in all, the FOMC minutes matter because they provide a window into the decision-making process of the Fed, provide investors and market participants with crucial information about the direction of monetary policy and its potential impact on the economy as well as the financial markets.

By tracking these minutes, investors can make more informed decisions about their portfolios and strategies.

Besides, Fed minutes move the dollar.

“Dollar is a currency for international trade, and the decisions and deliberations of the Federal Reserve have implications on the availability of dollar liquidity as well as the price points at which the dollar liquidity is available, primarily the interest rates," Vivek Iyer, who leads the financial services risk advisory practice at Grant Thornton Bharat, told Zeebiz.com.

How do Fed minutes impact you?

Iyer also explained that the Federal Reserve's decisions on interest rates impact the dollar and thereby the exchange rates across different currencies; hence, it is extremely imperative for investors to understand not only the decisions of the Fed but the thought process that was adopted to reach those decisions.

“The deliberations tend to have a second order effect on different asset classes, and assessing the impact of the same helps the investors make more informed investing decisions,” he said.

Here’s an example:

“The Fed's decision to hike interest rates results in increased demand for the dollar and thereby leads to depreciation in other currencies. This poses a negative impact on the investment holdings that are denominated in non-dollar currencies, resulting in losses. Investors read the Fed minutes to reflect on what has happened and what could possibly happen so that decisions around hedging or portfolio rebalancing could be taken on a timely basis,” Iyer added.