The biggest piece of market moving data released on Wednesday was the Minutes of the July Fed meeting, which included some surprising points. For example, committee members were concerned about the side effects of yield curve targeting, thus significantly reducing probability that the Fed starts to control medium and long-term rates in September. Equity sell-off and some gains in USD that we saw on Wednesday are basically revision of the odds of this outcome towards zero.

According to the Minutes, FOMC members felt it necessary to provide more clarity on the path of Federal Funds rate. Of course, this is a reference to the so-called "Revision of monetary policy strategy", which the Fed has been talking about for several months. As part of the current strategy, the Fed communicates its intentions in such a way that it retains some degree of uncertainty. If we think about underlying principles of this strategy, we can draw some interesting conclusions about propagation of policy changes in markets and economy.

Suppose the Fed, based on all available information about the current and future state of economy, decides that it makes sense to raise interest rate at the next meeting. At the same time, it communicates this intention to the public at the current meeting. Clearly, market players will price in the future hike immediately possiblycausing divergence of the markets (and economy) from the state expected by the Fed during the next meeting. At the time when the Fed actually hikes the rate, it affects the economy which may be in completely different state and impact of the rate hike may be completely different from expectations of the Fed. In other words, “full openness” policy leads to systematic bias in the Fed expectations about the impact from policy decisions. It seems that the Fed needs to "systematically mislead market participants" but do it smartly to make policy changes effective in boosting output and make correct expectations about the impact of its decisions.

However, due to lack of success of the current policy framework in stimulating inflation, the Fed wants to revise its policy in such a way as to tie its decisions to specific economic outcomes - raising inflation to n%, lowering unemployment to t%, or upon reaching some combination of inflation and unemployment. ... In other words, markets can be confident that policy changes will not occur, at least until the economic outcome is realized. In this case, the Fed will still retain uncertainty in its decisions but only after the economic parameters reach some predetermined values.

Lack of enthusiasm in the plans for YCC disappointed the markets a little since after the last meeting and bearish comments from the officials the markets had been actively pricing in this outcome in September.