Preview: FOMC Minutes
USD Into FOMC Minutes
Recent comments from regional Fed presidents (Williams, Lockhart and Kaplan) have forced rate markets to begin pricing more chance of Fed tightening in the coming months.US 2y yields have continued to rise in response, reaching new highs for May at 84bp and providing support to the USD. We see scope for this move to extend a bit further but do not anticipate a sustained revival of USD momentum.
We expect data in the weeks ahead to be too mixed to support expectations for hike in mid-2016. Perhaps more importantly, key members of the FOMC, including Chair Yellen herself, have been quiet lately but are believed to be much more cautious on policy.
The minutes to the April FOMC meeting to be released today will likely highlight the concerns of these members about slowing activity as was reflected in the statement at that meeting. Lastly, it remains far from clear that the risk environment can sustain a significant increase in Fed pricing. Indeed, the S&P 500 has fallen nearly one percent, presumably reacting in part to the adjustment in yields.
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Barclays: As expected, the FOMC took a cautious stance at its April meeting. We viewed the statement as leaving the door open for June but by no means promising a rate hike.
Although we believe that data since the April meeting have likely shifted the timing of the next hike from June to September, we believe that much of the caution of FOMC members apparent in the March meeting owed to early-year financial market volatility, and we look to the April minutes to judge the extent to which these concerns have waned.
In addition, we see the committee as a whole looking through the Q1 weakness; however, we look to the minutes for any split in views among committee members and the number of participants who are concerned that the slowdown reflects the new trend.
The April FOMC statement kept the Fed's options open, largely looking past the weak 1Q GDP data and slightly downplaying global and financial risks, but gave no clear signal on future policy. Since the meeting, a number of Fed officials have suggested that the Fed could still hike (at least) twice this year, whereas many Fed Watchers – including us – have recently revised expectations for rate hikes this year to just one. In this sense, the minutes are likely to be relatively stale. Market attention should focus on what conditions Fed officials indicate would be needed to hike, rather than any discussion of explicit timing that may appear in the minutes. An indication at the April meeting that the Fed remained quite far away from its next hike would likely be dovish for the markets.
BofAML: In the March Summary of Economic Projections (SEP), more Fed officials saw downside growth risks versus December. However, the April statement highlighted "additional strengthening of the labor market" as well as strength in household real income, consumer sentiment and housing. How the Committee assesses the risks around growth and what growth pace would be sufficient to support additional hikes would notable. So to would be the debate around how much slack remains.
On inflation, the April statement remained cautious and changed little. An assessment that inflation or inflation expectations have started to improve would also be notable, and mildly hawkish. The minutes may also discuss how the Fed intends to interact with and guide the markets through communication. Examples might include re-introduction of a balance of risks, changes to the “monitoring” language, and explicit signals in the statement. We expect some debate over the timing and implementation of any changes to Fed communications.
Additional discussion topics that should get attention may include: the recent decline in the trade-weighted US dollar and the impact of exchange rate movements on Fed policy, the outlook for global growth (particularly China) and the corresponding risks (such as Brexit), and the growth rate of productivity.
Forward-looking discussions around the number and pace of hikes might also garner some attention, but as suggested above the market should generally fade these as old news. We expect the broad tone to be consistent with additional rate hikes later this year.
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