"A Few," "Most," "Almost All" - In Fed Minutes, the Difference Isn't a Headcount. It's a Price.

The core idea: markets don't trade policy, they trade the gap between policy and expectations

There is a whole body of theory behind that sentence. Muth introduced the rational expectations hypothesis in 1961: economic agents form expectations using all available information rather than simply extrapolating from the past. Lucas, Sargent and Wallace carried it into monetary policy in the 1970s and reached a conclusion that still shapes central bank behaviour today - only unanticipated monetary policy moves the real economy. Fully anticipated policy has already been absorbed into prices before it is ever announced.

Translated into trading terms: the price reaction at the moment of a decision is proportional to "actual outcome minus market expectation," not to the outcome itself.

July's hold was widely expected going in, so there was very little room to price on the day. What the statement did not answer was the degree of internal disagreement - how close those three dissenters came to bringing the committee with them. That information waits three weeks for the minutes, which means it has not been priced yet.

Argument one: this isn't a hunch. The Fed has measured it.

Carlo Rosa of the New York Fed published a dedicated study in the Economic Policy Review in 2013: on minutes release days, the volatility of two-year Treasury yields runs roughly three times higher than on ordinary days, comparable in magnitude to major economic reports such as the ISM manufacturing index. The volatility is concentrated in the 10 to 20 minutes immediately following release.

Nechio and Wilson at the San Francisco Fed ran an even more direct comparison in 2016. Measured on five-year Treasury yields, FOMC statement days produce an average move of 6.5 basis points, minutes days about 5 basis points, and ordinary trading days just 3 basis points.

Those two numbers are worth pausing on. The minutes deliver no new decision, yet land close to 80% of the force of the decision itself - and 1.7 times that of a normal day.

Here I want to correct a widely repeated claim that I nearly wrote down myself: that minutes move markets more than decisions do. That does not survive contact with the data - on average they move markets slightly less. The accurate formulation is this: a document containing no news at all can produce volatility of nearly the same order as the decision. Which is precisely what rational expectations theory predicts.

Rosa also has an honest finding worth reporting alongside the rest: the market impact of minutes has been declining since 2008. His interpretation is that the Fed's routine communication has become more timely, leaving the minutes with less incremental information to deliver. That cuts against this article's argument. It is also true.

Argument two: three real cases, and one counterexample

April 6, 2022 (March meeting minutes) - the minutes revealed plans to shrink the balance sheet by roughly $95 billion a month ($60 billion Treasuries plus $35 billion MBS), well beyond what markets had expected. US equities fell for a second straight session and Treasury yields held higher. One strategist's summary at the time was that the minutes were telling anyone who thought the Fed would go easy that they were wrong.

August 18, 2021 (July meeting minutes) - the minutes showed officials saw scope to begin tapering asset purchases within the year if the economy improved as expected. The following day spot gold fell 0.5% to $1,779.52 an ounce and the dollar index climbed to a nine-month high. This was a minutes move that landed directly on gold. The sequel matters too: because the minutes also showed no consensus on the timing of the taper, the dollar subsequently retreated from its high and the move was partly unwound.

October 8, 2014 (September meeting minutes) - this is the counterexample I owe you. The minutes showed officials worried about slowing global growth (China and the euro zone in particular) and about a rapidly appreciating dollar hurting exports and holding inflation down. Markets read it as a delayed hike. The Dow surged 275 points, close to 2%, its best single day of 2014; the Nasdaq gained 1.9%.

An earlier draft of this piece said minutes "almost only ever surprise in the hawkish direction." October 8, 2014 is a counterexample with enough weight to sink the strong version of that claim. I have downgraded it to the weaker version below, which does have empirical support.

Disclaimer

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