The minutes of the Federal Reserve's June meeting will soon be revealed, but the market may find it difficult to find clues for interest rate hikes.

Source: Jinshi Data

At 2 AM Beijing time on Thursday, the Federal Reserve will release the minutes of the June policy meeting. The financial market is currently cautious, and investors are waiting to see if the interest rate decision will be made at the meeting at the end of this month.

These minutes may not provide much reassurance to the market. Experts believe that the new Federal Reserve chair Kevin Warsh will likely not use the minutes to hint at how close the Fed is to tightening monetary policy.

Steven Englander, Global Head of G10 Foreign Exchange Research at Standard Chartered Bank, stated that Warsh may end the practice of occasionally allowing investors to "peek behind the scenes" through the minutes.

Since taking office at the end of May, Warsh has fulfilled his previous commitment: compared to previous Fed chairs, he talks less publicly about the central bank's policy intentions. Keeping the content of the minutes vague may be part of this communication strategy.

After the June meeting, the statement released by the Fed was extremely brief. Warsh subsequently also avoided questions from reporters about the interest rate outlook.

Although the Fed remains relatively silent, the market has read hawkish signals from the June meeting, indicating that the policy is leaning closer to interest rate hikes. Economists initially expected at least a few officials to believe that an interest rate hike would be necessary this year, but the signal from as many as nine officials still surprised them.

Warsh Continues "No Forward Guidance"

At the beginning of July, when Warsh attended a policy seminar with other central bank governors, he again "remained silent on topics relevant to the market." Citi economists made this description in a recent report to clients.

Englander believes that Warsh will likely continue this communication style into the meeting minutes.

"Warsh has clearly stated that the Fed does not provide forward guidance," he said, "I don't think he will let the minutes become a backdoor for the market to see what he doesn't want to be seen."

The Fed records audio of policy meetings, but the formal meeting minutes are not released until five years later. What the market sees at this stage is the internal discussion "summary" released by the Fed three weeks after each meeting.

Warsh may bring the Fed back to the era of former chairs Paul Volcker and Alan Greenspan. Both were cautious about excessive transparency, and the meeting minutes at that time also contained less information useful to the market.

"Occasionally you might get some clues about policy debates, but that's just a small part of the information we can see right now," Englander pointed out.

Former chair Ben Bernanke reformed the meeting minutes during his tenure. He was the first to include the views of non-voting members, allowing outsiders to gain a more comprehensive understanding of the policy views of all 19 Federal Reserve officials.

Even if the Fed under Warsh reduces transparency, Englander still believes that the minutes are of reference value for investors.

"We will infer from the minutes what Warsh wants us to know and what he does not want us to know. This will help us understand how he intends to lead the Fed," he said.

Reduction in Communication Raises Credibility Discussion

Warsh has stated that he welcomes divergences among Federal Reserve officials, even welcoming "family debates," which means officials discuss policies openly.

Englander pointed out that "family debates" have another meaning: the debates take place in a closed-door environment, and outsiders do not know the specific topics.

Federal Reserve officials seem to have realized that Warsh is promoting a reduction in policy commentary. According to Bloomberg's Federal Reserve activity calendar, since the last meeting at the end of June, Federal Reserve officials have only spoken publicly 18 times.

This number is significantly lower than previous levels. It was 49 times the same period last year and 55 times two years ago.

Economists are not comfortable with Warsh's approach of reducing the Fed's voice. They believe that the Fed does not need to provide "forward guidance" locking in specific actions, but should let investors understand how the Fed will respond to economic changes.

"When the market has to guess—both what the latest data means for the economic outlook and how the Fed will respond to these changes—the market signals become blurred," Lou Crandall, Chief Economist at Wrightson ICAP, wrote in a report to clients.

Many economists believe that the more silent the Fed is, the more likely asset price volatility will increase. Englander believes the impact will not be too significant, but he added that "mins lacking information" may raise credibility issues.

So far, Warsh has not indicated that he will raise interest rates when necessary. He has only promised to maintain price stability.

"Deliberately avoiding any discussions about interest rate hikes may ultimately be interpreted by the market as unwillingness to act," Englander said, "If the market believes he does not want to discuss interest rate hikes out of a desire not to offend the president, and the data indicates that interest rate hikes should be on the agenda—then it will evolve into a credibility issue."