Those hoping the minutes of the latest FOMC meeting would make up for the lack of colour in February’s little-changed policy statement will have been disappointed by today’s release. There was, predictably, no discussion of raising rates at the February meeting on the heels of December’s rate hike. Many participants noted that a further increase in the fed funds rate would be appropriate "fairly soon" if the incoming data met or exceeded their expectations. That comes as no surprise given recent comments from Fed speakers. Some participants thought it might be appropriate to raise rates as soon as the upcoming meeting in March – seeing an opportunity to increase the Committee’s flexibility to respond to any unexpected firming in economic conditions – although that view did not appear to be widespread.
The Committee’s assessment of economic conditions was relatively upbeat, mirroring some of the few changes in February’s policy statement. Participants noted solid domestic demand toward the end of last year, further improvement in labour market conditions and gradually rising inflation; however, those positive developments were not enough to change their economic forecasts or monetary policy outlook relative to December. It is worth noting that, since February’s meeting, we have seen upside surprises in employment and inflation reports for January. Risks to the outlook were once again characterized as "roughly balanced", though participants saw the potential for fiscal stimulus as increasing upside risks to the outlook, while several saw the risk of slower economic activity as "diminished somewhat". Some thought uncertainty should not prevent the Fed from removing monetary policy accommodation in the near-term although others warned against adjusting monetary policy in anticipation of fiscal policies that might not materialize or be as effective as anticipated.
Our Take:
As with the post-meeting statement, February’s minutes provide little for markets to digest in terms of forward guidance on rate hikes or reinvestment. Recent comments from Fed officials indicate that while there is no rush to shrink the balance sheet, further rate hikes in the coming months are likely. A run of positive economic data and a slightly hawkish tone from Chair Yellen last week raised the odds of a rate hike at the upcoming meeting, although markets continue to see that as less than a 50/50 prospect. Today’s minutes seem consistent with that interpretation – while there was some appetite to raise rates as early as March, there is little evidence that a consensus is forming. We remain of the view that a hike is likely by mid-year but that the Committee will wait until June hoping there is more clarity on fiscal policy.
