With stocks reeling, the Fed's release of its January meeting minutes Wednesday could have even more impact than usual if they provide new insight on inflation or interest rates.
The minutes could be a window into what new Fed Chair Jerome Powell might say when he testifies on the economy next week. Powell is appearing for the first time as chair before Congress on Feb. 28 for his semi-annual testimony on the economy.
Fears of rising inflation are at the heart of what's ailing the stock market because it eats away at corporate profit margins and could force the Fed to raise interest rates even faster than it currently forecast. Higher interest rates compete with stocks as investments and make the cost of borrowing higher for investors and business.
Inflation expectations have been climbing, and have been showing up in recent wages and consumer inflation data, catalysts behind the bond market sell-off. Bond yields move opposite price. The 10-year Treasury was as high as 2.93 percent Tuesday morning but fell to 2.88 percent as stocks sold off sharply.
"I think we need to hear his testimony. That's the biggest thing. The minutes could be important in firming up our understanding of how gradually he's going to take away the stimulus," said Chris Rupkey, chief financial economist at MUFG Union Bank. The minutes are released at 2 p.m. ET.
"He's still sort of an unknown guy. He said in last week's statement, when he was at a ceremonial swearing-in, that he's going to continue down the path of gradual normalization, but I think he still might shake things up as a businessman in there," Rupkey said.
The January meeting was chaired by Janet Yellen, the previous chair, and the Fed took no action. But it did toughen up its talk around inflation, so there could be more explanation of Fed officials' views in the minutes.
Powell's testimony is expected to reflect the views of the Fed, but he could still bring his own spin to it.
The minutes are being released at a time when the markets are anxious for direction on how the Fed is interpreting inflation and what it means for interest rates. There has also been a void, as Yellen exited just ahead of the latest inflation reports, and Powell has yet to speak.
"For all the nuance of their statement, the fact is that language is very imprecise, deliberately so. ... They don't want to rock the boat. They could do it accidentally, for sure," said Aaron Kohli, fixed income strategist at BMO. The Fed also releases the Monetary Policy Report on Friday, ahead of Powell's testimony.
After months of sluggish inflation, the recent firming data could be pointing to an acceleration, and the key is whether the Fed believes that or not. In the post-meeting statement, the Fed dropped some of its prior pessimism about sluggish inflation.
The Fed noted that inflation expectations have been rising, and it eliminated language from the prior minutes about inflation having declined. The Fed also included that it expects to see inflation move up this year and stabilize around its 2 percent target. Two days after its last meeting, a hotter wage number in the January employment report helped send bonds and stocks tumbling in what has now become more than two weeks of volatility.
In that meeting statement, the Federal Open Market Committee also said it expects "further" gradual increases in the fed funds rate, suggesting to some in the markets that Fed officials are contemplating more than the three rate hikes they forecast for this year.
Kohli said the fact that the Fed raised rates three times and began to slow down bond purchases last year added to its credibility. "Their believability has been restored, so they're now more able to move the market."
"This is kind of a blueprint for [Powell]," he said of the minutes.
The Fed currently has three interest rate hikes forecast for this year and is expected to raise rates at the March meeting. The Fed also provides new economic and interest rate forecasts after that meeting, and Powell will also speak publicly to the press after the meeting.
"What people will focus on is do they say anything lending confidence for them to hike four times [this year], and then do they choreograph that desire in March. The risk is that those minutes are going to show a pending change in their interest rate forecast," he said.
Both stocks and bonds have been adjusting to the view that inflation could pick up to a more normal rate or even get hotter.
"I think we're going to see wage inflation push up to the upper 3 [percent range], and CPI inflation got to 3. I think we have had a mindset about 2 percent inflation throughout this recovery, and we're going to have a mindset that it's more like 3. That's a big change," said James Paulsen, chief investment strategist at Leuthold Group.
Paulsen said the market will struggle against the changing picture for inflation. "The worst this does is probably flatten out the market. For a period, it could push the pause button but not the stop button. If you had this going without synchronized global growth and you were growing at 2 percent, it would be a different story," he said.
Powell is not really known to the markets even though he's been a Fed governor. "This is a brand new deal with him having to speak post-meeting. That's probably a big deal or could be a big deal because it's going to form how people feel about his approach. We don't really have a view of him. Everyone's of the opinion, he's a Yellen II," said Paulsen.