Fed minutes are a comprehensive record of the meetings, which offer detailed insights regarding the FOMC's stance on monetary policy.
America is a leading financial and economic center, which issues U.S. dollar, i.e., the world reserve currency. This is why when the United States sneezes, the rest of the world catches a cold. And why investors closely monitor the actions of the Federal Reserve, the central bank of the United States.
Probably the most important branch of the Fed is the Federal Open Market Committee (FOMC), which determines the U.S. monetary policy. It determines the open market operations and the growth of the money supply, and sets the federal funds rate. To analyze the current market situation and make proper decisions, the FOMC members meet eight times a year.
To provide transparency and communicate with the markets, the FOMC issues a policy statement following each regular meeting. The statement summarizes the Committee’s economic outlook and the policy decisions undertaken at the meeting. The release of the document is very often a key event for the financial markets, as it contains the outcome of the vote on the interest rates. Investors also seek clues about the Fed’s stance and the likely future votes. The statement is released at 2 p.m. on the final day of each meeting. Statements can be found here.
Three weeks after the date of the policy decision, the minutes are released (while transcripts of meetings for an entire year are released to the public with a five-year lag). What are the minutes? They are a comprehensive record of the meetings, which offer detailed insights regarding the FOMC’s stance on monetary policy. In particular, they provide the Fed’s summary of the developments in financial markets and open market operations, the U.S. Central Bank Staff’s review of economic and financial situation, as well as economic outlook. But investors focus on the FOMC members’ views on current conditions and the economic outlook and, of course, the committee policy action.
Fed Minutes and Gold
Both the Fed statements and the following minutes are important events for the markets, as they alter the U.S. monetary policy. The minutes come with a lag, so their impact is somewhat weaker than the statements, but still it is meaningful. For example, the 5-year Treasury yield on average moves up or down by about 0.065 percentage point on the day of an FOMC statement, while the average change on the day of the minutes release is a little under 0.05 percentage point.
What is the impact of the statements and minutes on gold? Well, generally speaking, a more dovish than expected statement/minutes could be taken as negative for the U.S. dollar and bullish for gold, while a more hawkish than expected statement could be taken as positive for greenback and bearish for gold.
The example may be the surprisingly hawkish Fed monetary policy meeting in October 2015. The released statement from that meeting chaired by Janet Yellen opened doors for an interest rate hike in December, which strengthened the U.S. dollar and sent gold prices south, as one can see in the chart below.
Chart 1: Gold prices in 2015 (London P.M. Fix, in $).
Both Fed statements and minutes can offer significant insights into the Fed’s mindset and can help to better guess the future FOMC actions. Investors should remember that markets are forward-looking and they ultimately price their understanding of Fed communications into bond yields, affecting borrowing costs for businesses and households and constituting a key transmission mechanism of monetary policy. Gold is also importantly affected by the Fed’s communication. However, the impact is not always significant – a lot depends on whether the U.S. central bank surprises the investors.