FOMC minutes – parsing the adjectives


The FOMC minutes from October’s meeting are unlikely to damage expectations of a December Fed funds rate increase, especially as there was clear intent by the Fed at the meeting to shift market expectations towards expecting a December move. There are, however, likely to be important caveats surrounding longer-term expectations and a strong commitment to the pace of rate increases being slow and gradual. Doves on the committee may have conceded ground over a December hike, but their commitment to slowing the pace of further hikes is likely to have hardened given the low inflation profile. Given these background concerns, there is a strong case for fading any initial dollar gains following the release of the minutes, especially as initial lift-off is now priced into the dollar.

The Fed statement from October’s meeting triggered the latest bullish dollar phase with a sharp shift in expectations surrounding a December rate hike. From lows around 35% ahead of the meeting, the probability of a December move is now closer to 70%. Soon after the October statement was released, Atlanta Fed President Lockhart stated that the Fed had looked to shift market expectations and had succeeded. The minutes will not therefore contradict current market expectations surrounding next month’s meeting as the Fed clearly wanted the markets to price in a greater chance of a December move.

There will still be a strong focus on adjectives such as one, a few, several, many and most used to describe the various policy positions within the committee, underlying confidence in the outlook and the degree of support for expected policy actions. The key sentences in the Fed statement was this: In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

The description of a support for a rate increase at the next meeting will be very important. A comment that most members expected that enough progress had been made to justify a move at the next meeting would be a strong affirmation while a less confident use of the word several would suggest that there are still very important doubts within the committee which could sway sentiment in December and trigger fresh doubts within weak hawks. In contrast, any comments that many members actually favoured a rate increase at the October meeting would be another notably hawkish sign.

Similarly, comments on inflation developments will be very important for expectations given that reported inflation is still very low. The core committee surrounding Yellen place great store in labour-market indicators and they will expect a tight labour market to push up domestic wage costs. There is little doubt that out-going Minneapolis president Kocherlakota expressed fears that inflation was too low, but the implications will be much more significant if several or many members were concerned over low inflation and potential deflationary impulses from abroad. In this environment, the barrier to further rate hikes would be much higher.

The other key element in the October statement was a dropping of references to concerns over international developments and the risk that weakness elsewhere, coupled with a strong dollar, would have a negative impact on the US and effectively delay a rate increase. Markets will be looking for the underlying discussion on international developments and the dollar as it must have taken place. Any references to many members being concerned over the international dimension and concerned over dollar strength would be dovish. References to global monetary policies will also be very pertinent given the dovish ECB meeting from October.

There is likely to be a further commitment to keeping interest rates at lower than normal levels over the next few years. There are also likely to be concerted efforts by doves on the committee to lower longer-term rate expectations and reinforce the commitment to a very slow and gradual path of rate increases.

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