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USD: What To Expect From This Week's FOMC Minutes & NFP Report?
The consensus trade going into the New Year is long the USD, which is the same as last year. Last year, weak US economic data and a shift in rhetoric by the FOMC led to this consensus trade being undone by late January/early February.
With this in mind, the key risk events for the USD this week are likely the December FOMC Minutes and the NFP report.
While the Fed’s median projection for the FF rate at the end of 2017 increased to 1.4% in the December SEP from 1.1% in the September SEP, the mean projection only increased 6 bps and was likely a reason why Chair Yellen downplayed the change.
As a result, our economist expects the minutes to express a more cautious view on the rate outlook than indicated by a superficial reading of the dot plot. This outcome would represent a reversal from the trend in 2016 of the FOMC decision weakening the USD and the Minutes strengthening the USD.
Our US economist looks for firm US economic data this week with NFP predicted to rise by 185K and the unemployment rate to tick upward to 4.7% (consensus 175K and 4.7%).
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At their December meeting the Federal Reserve's Federal Open Market Committee hiked rates
Goldman: We receive the December FOMC Minutes on Wednesday, which we will be watching for discussion of potential policy changes under the new administration, as well as the rationale behind the hawkish shift in thedot plot.
UBS: The December meeting minutes may reveal more colour on the rationale behind the evolution of the dot plot and the lack of a shift in economic forecasts. Our economists believe the latter is perhaps due to Fed officials taking a "wait and see" attitude regarding the impact of potential fiscal and other government policy changes. We maintain our view that the Fed will tighten via two rate hikes in 2017.
Barclays: We believed coming into the meeting that members would be reluctant to incorporate policy changes post election. However, despite saying that it is "far too early" to judge the effects of fiscal policy, Chair Yellen noted that "a few" members incorporated policy changes into their forecast. These adjustments did not change the range of member forecasts and we look to the minutes for clarity on how potential policy changes may have influenced the outlook. In addition, we look to the discussion to judge whether the FOMC sees fiscal stimulus as likely to substantively boost potential output. Yellen took a dim view on this possibility and hence is likely to advocate faster rate hikes in response to a large increase in spending.
Preview: 3 Things To Look For At December FOMC Minutes
1- The minutes from the December 14th FOMC meeting are likely to reveal modest optimism about the improvement in the recent data but a “cloud of uncertainty” about how fiscal policy could change the trajectory. While it seems likely that there will be some form of fiscal stimulus, the details are not yet apparent which makes it difficult to gauge the risks to the forecast. We therefore think the minutes will show that there was a conversation about the possible scenarios without committing to the outcome. We also think that Fed officials likely discussed the health of the labor market with a particular emphasis on measuring slack in the labor market given the drop in the unemployment rate to 4.6%. The labor force participation rate has edged higher this year, but in a very choppy fashion making it hard to decipher the trend. Moreover, the improvement in wages has been uneven, further complicating whether we have returned to full employment.
2- Inflation will also be in focus. The statement noted that although market measures of inflation compensation have moved up considerably, they remain low. And meanwhile survey-based measures remained little changed. Seemingly the Fed is not concerned about a rise in inflation expectations that could bias inflation higher. We think there will likely be a bit of a debate over the risks to inflation.
3- We will also look out for any conversation about risk management. Interestingly, Fed Chair Yellen did not talk about the asymmetry when policy is close to the effective lower bound. When asked about allowing the “economy to run hot” she said that it was not the Fed’s intention to be behind the curve with policy. This was perceived to be a hawkish signal by the markets. It will be interesting to see the discussion among Fed officials about the risks.
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Preview: What's priced in for the Federal Reserve ahead of the FOMC Minutes
In general, the Minutes are a release that always gets more attention than deserved. It's rare the report moves the market and the initial move is often reversed.
But that might not be the case this time because the FOMC hiked rates at the December meeting and left the timing on subsequent rate moves ambiguous. The big market driver was the change in the dot plot.
USD: FOMC Minutes To Reveal A Greater Degree Of Caution
With monetary policy divergence likely to be a key driver of dollar movement in the early part of this year, the FOMC minutes from the meeting in December to be released today may prove important.
Given the Fed obviously raised rates and also upped the DOTS profile for this year from two hikes to three hikes, the details of the minutes may prove important for the markets. Yellen has already told us that some of the FOMC altered their end-2017 fed funds estimate based on expectations of fiscal expansion under President-elect Trump even though we don’t know what that might amount to. So it might not take much for the median to drop back again.
Hence, what is more important to us in reading tonight’s minutes will be any changes to the assessment of the economy that are beyond Trump’s fiscal influence. That would be more meaningful and suggest resilience in the Fed’s thinking on a faster pace of tightening even if Trump was to disappoint on the fiscal side. It is also worth remembering that the voting FOMC members have changed and hence the DOTS might not reflect the more dovish voting in 2017 relative to 2016. Out go Fed Presidents George, Mester, Bullard and Rosengren and in come Evans, Harker, Kaplan and Kashkari. Three of those four 2016 Presidents (all but Bullard) voted to hike last September and hence the incoming 2017 Presidents are likely to have a more dovish leaning than last year’s. The median DOTS message needs to be viewed in the context of not knowing which DOTS belong to which Presidents.
Our hunch is that the minutes might reveal a greater degree of caution over the outlook for the economy than one might expect given the DOTS increase for this year.
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Scotiabank: USD Dips Into FOMC Minutes A Buy.
Focus for the session ahead will fall on the FOMC minutes of the December 14th rate hike meeting....Fundamentally, nothing has changed - the US economy remains in good shape and expectations for the Trump bump to growth (and the USD) remain intact. Spreads - a key source of support for the USD rally since November - are stable against the major currencies. We continue to think that minor USD dips are a buy.
Credit Agricole: A Reverse Of A Pattern.
We expect the FOMC minutes to express a more cautious view on the rate outlook than was indicated by the market's initial reaction to the FOMC announcement. US rates and the USD reacted strongly to the upward revision of the 2017 median FOMC dot, but as our economists point out the mean dot has moved very little and Chair Yellen was careful to downplay the extent of the change in Fed policy outlook during her press-conference. Up until the December meeting, FOMC minutes have tended to partly reverse the USD weakness in reaction to the FOMC meetings. We suspect this pattern could be reversed this time, with the USD rallying after the meeting but vulnerable to weakness on the release of the minutes. From a broader perspective, the USD has surprisingly failed to take advantage of strong US data this week. This could be partly explained by less liquid markets at the start of the year, with FX traders caught too long the USD on Tuesday. However we also see this as a broader message for 2017: the USD uptrend is still your friend but investors will need to be more selective about positioning. Markets have been increasingly focusing on president-elect's personnel appointments, protectionist rhetoric vis-à-vis China and pressure on US companies to avoid sending job overseas. Against this backdrop we believe the USD is likely to do best against emerging Asian currencies and G10 commodity exporters as the risk environment turns more uncertain.
RBC: Little In Minutes To Derail The USD Rally.
the main news is the minutes of the December 13-14 FOMC meeting. The vote for the 25bp rate hike which was delivered was unanimous, so the minutes are likely to reflect a relatively narrow range of views. This was also apparent in the sharp reduction in dispersion of forecasts around the median in the "dot plot". As such, there should be little to derail the current USD rally
BofA Merrill: 3 Things To Look For At December FOMC Minutes.
1- The minutes from the December 14th FOMC meeting are likely to reveal modest optimism about the improvement in the recent data but a "cloud of uncertainty" about how fiscal policy could change the trajectory. While it seems likely that there will be some form of fiscal stimulus, the details are not yet apparent which makes it difficult to gauge the risks to the forecast. We therefore think the minutes will show that there was a conversation about the possible scenarios without committing to the outcome. We also think that Fed officials likely discussed the health of the labor market with a particular emphasis on measuring slack in the labor market given the drop in the unemployment rate to 4.6%. The labor force participation rate has edged higher this year, but in a very choppy fashion making it hard to decipher the trend. Moreover, the improvement in wages has been uneven, further complicating whether we have returned to full employment.2- Inflation will also be in focus. The statement noted that although market measures of inflation compensation have moved up considerably, they remain low. And meanwhile survey-based measures remained little changed. Seemingly the Fed is not concerned about a rise in inflation expectations that could bias inflation higher. We think there will likely be a bit of a debate over the risks to inflation.3- We will also look out for any conversation about risk management. Interestingly, Fed Chair Yellen did not talk about the asymmetry when policy is close to the effective lower bound. When asked about allowing the "economy to run hot" she said that it was not the Fed's intention to be behind the curve with policy. This was perceived to be a hawkish signal by the markets. It will be interesting to see the discussion among Fed officials about the risks.
Goldman: The Rationale Behind The Hawkish Shift In The Dot Plot.
We receive the December FOMC Minutes on Wednesday, which we will be watching for discussion of potential policy changes under the new administration, as well as the rationale behind the hawkish shift in the "dot plot".
UBS: The Rationale Behind The Evolution Of The Dot Plot.
The December meeting minutes may reveal more colour on the rationale behind the evolution of the dot plot and the lack of a shift in economic forecasts. Our economists believe the latter is perhaps due to Fed officials taking a "wait and see" attitude regarding the impact of potential fiscal and other government policy changes. We maintain our view that the Fed will tighten via two rate hikes in 2017.
Barclays: Clarity On Impcat Of Potential Policy Changes On Outlook.
We believed coming into the meeting that members would be reluctant to incorporate policy changes post election. However, despite saying that it is "far too early" to judge the effects of fiscal policy, Chair Yellen noted that "a few" members incorporated policy changes into their forecast. These adjustments did not change the range of member forecasts and we look to the minutes for clarity on how potential policy changes may have influenced the outlook. In addition, we look to the discussion to judge whether the FOMC sees fiscal stimulus as likely to substantively boost potential output. Yellen took a dim view on this possibility and hence is likely to advocate faster rate hikes in response to a large increase in spending.
BTMU: FOMC Minutes To Reveal A Greater Degree Of Caution.
With monetary policy divergence likely to be a key driver of dollar movement in the early part of this year, the FOMC minutes from the meeting in December to be released today may prove important.Given the Fed obviously raised rates and also upped the DOTS profile for this year from two hikes to three hikes, the details of the minutes may prove important for the markets. Yellen has already told us that some of the FOMC altered their end-2017 fed funds estimate based on expectations of fiscal expansion under President-elect Trump even though we don't know what that might amount to. So it might not take much for the median to drop back again.Hence, what is more important to us in reading tonight's minutes will be any changes to the assessment of the economy that are beyond Trump's fiscal influence. That would be more meaningful and suggest resilience in the Fed's thinking on a faster pace of tightening even if Trump was to disappoint on the fiscal side. It is also worth remembering that the voting FOMC members have changed and hence the DOTS might not reflect the more dovish voting in 2017 relative to 2016. Out go Fed Presidents George, Mester, Bullard and Rosengren and in come Evans, Harker, Kaplan and Kashkari. Three of those four 2016 Presidents (all but Bullard) voted to hike last September and hence the incoming 2017 Presidents are likely to have a more dovish leaning than last year's. The median DOTS message needs to be viewed in the context of not knowing which DOTS belong to which Presidents. Our hunch is that the minutes might reveal a greater degree of caution over the outlook for the economy than one might expect given the DOTS increase for this year.
Danske: Insights On Outlook for 2017.
The FOMC minutes from the December meeting are due to be published tonight. It will be interesting to see what discussions the members had about the outlook for 2017, as the Fed was more hawkish than expected.
Lloyds: Insights On The Increase In The Dot Plot.
The main focus is likely to be on the FOMC minutes. After raising rates by 25bps, the market will be looking for further insight into why the "dot plot" expectations increased from two more hikes next year to three, despite their economic forecasts not changing much. Further scrutiny will be on whether President elect Trump's fiscal policy was discussed.
Dec FOMC Minutes: A Fed In Waiting: 4 Observations
The minutes to the December FOMC meeting, in our view, provide little new information relative to what we learned from the FOMC statement, the policy action to raise the federal funds rate, and the press conference at the December meeting. Our main take-away is that the monetary policy outlook, as reflected in the dot plot and summary of economic projections, is still largely based on pre-election assumptions. Although the minutes indicate that Fed staff and many FOMC participants incorporated expansionary fiscal policy in their forecasts, the changes were generally minor and offset by the expectation that long-dated interest rates would be higher and the dollar would appreciate. While the Fed signaled that it would likely respond to expansionary fiscal policies with a faster pace of rate hikes, the Fed believes it is too early to embed this into its baseline. Any real shift in the stance of monetary policy will require more clarity on the stance of fiscal policy. Altogether, we see the Fed as waiting and reacting to developments in fiscal policy, which is a significant change from the past decade when monetary policy took the lead role in responding to the crisis.
After taking a look at the details of the minutes, we make the following observations:
1. The minutes indicate that Fed staff’s forecast for real GDP growth over the next several years was “slightly higher” than in September, “largely reflecting the effects of the staff’s provisional assumption that fiscal policy would be more expansionary.” However, these effects were “substantially counterbalanced” from the assumption that the path for long-term interest rates and the foreign exchange value of the dollar would be higher. On net, this meant that the staff’s outlook for activity, inflation, and unemployment was largely unchanged relative to that prior to the election. The staff still sees numerous downside risks.
2· Like the staff, “almost all” FOMC participants indicated that upside risk to their forecasts for growth “had increased as a result of prospects for more expansionary fiscal policies” over the forecast horizon. Some members also noted more favorable business investment given the uptick in business sentiment, while others pointed to downside risks from a stronger dollar, financial vulnerabilities in some foreign economies, and constraints from policy being near the lower bound. There appeared to be little to no discussion on supply side effects of expansionary fiscal policy and tax reform. On balance, FOMC participants still considered it far too early to judge how the outlook for the economy and, in turn, monetary policy had changed following the election.
3. At two different places in the minutes, FOMC members shared their concern about an undesired undershooting of the natural rate of unemployment. In discussing the possible implications of a more significant undershooting of unemployment than currently envisaged, “many participants emphasized that…timely adjustments to monetary policy could be required to achieve and maintain” the dual mandate. “Most participants” also judged that the risk of a “sizeable undershooting” of the longer-run unemployment rate had risen “somewhat” and, as a result, the FOMC “might need to raise the federal funds rate more quickly than currently anticipated” to limit potential upside risk to inflation. In our view, the committee is clearly signaling that, should expansionary fiscal policy be forthcoming, and, should such policies generate a further decline in the unemployment rate and faster firming inflation, then the committee would likely respond by raising rates faster than the three-rate hike median in the dot chart. In other words, monetary policy will not be passive in the face of expansionary fiscal policy.
4· While at several places the minutes contain discussion on fiscal policy and its potential effects on the economic outlook, the minutes make no mention of restrictive trade policies. In our view, the discussion on the balance of risks is incomplete and, hence, may evolve. The Fed’s assessment of the balance of risks to the outlook and the effects of fiscal policy are likely to change as the Trump administration provides additional clarity on fiscal and trade policy plans.
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Fed's Lacker: 'Upward adjustment needed' for Fed rate target
Hawkish talk from an uber-hawk
Lacker calling for hikes is nothing new, he's been doing the same song and dance for almost a decade.
Fed Chair Janet Yellen Promotes the Value of an Economics Degree
Federal Reserve Chair Janet Yellen promoted the study of economics at a town hall meeting in Washington, D.C. on Thursday night, but stopped short of commenting on the current state of the economy.
Yellen, who has headed the Fed for almost three years, said the study of economics helps students manage their personal finances and gives them the analytical skills needed in work and in life. Yellen, who was speaking at the town hall meeting in Washington, D.C., made no mention of the economy’s current state or the future path of monetary policy.
The Fed Chair sits on the Federal Open Market Committee (FOMC) responsible for setting the nation’s monetary policy. On December 14, the FOMC voted to raise the target for the federal funds rates by a quarter point to 0.75%. Markets are speculating about when policymakers will hike again.
Rate-setters are scheduled to meet again January 31-February 1 for the Fed’s first policy meeting of the year. While no change in policy is expected, the central bank is anticipating three hikes over the next 12 months as the economic engine gathers momentum.
Incoming President Donald Trump has also promised faster growth by way of fiscal stimulus, corporate tax cuts and deregulation. Trump, who has been critical of central banking, will be inaugurated January 20.
Markets and economists less hawkish than Fed on rate hikes
Markets continued to price in only two rate hikes by the Federal Reserve (Fed) in 2017, in line with a poll of 100 economists released on Wednesday and less aggressive than the central bank’s own call for three increases this year.
Fed fund futures currently price in a first hike in June with the second not occurring until December, according to Investing.com's Fed Rate Monitor Tool.
That coincided with a Reuters’ poll of 100 economists that showed interest rates remaining at the current level of 0.50%-0.75% until the second quarter when a 25 basis point hike is likely.
The survey further showed that consensus put the next tightening to 1.00%-1.25% to occur in the fourth quarter.
Of note, the news agency highlighted that 14 of the economists surveyed were more hawkish, putting their bets on the first hike to take place in March.
Inflation data released on Wednesday also convinced ING senior economist James Knightly that the first move would come by the end of the first quarter.
Knightly noted that it was the first time that both headline and core U.S. inflation had breached 2% since the second quarter of 2014.
“With headline inflation likely to move up towards 2.5% in the second half of the year and President Trump promising pro-growth and pro-job policies in what already is a fairly strong story, it means further Federal Reserve rate hikes are not far away,” he insisted, specifying that he forecast the first hike to be in March with another move higher in the third quarter.
Market participants may have a chance to hear Fed chair Janet Yellen’s comments on the inflation data when she responds to questions after giving a speech on monetary policy to the Commonwealth Club in San Francisco later on Wednesday at 3:00PM ET (20:00GMT).
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