The USD caught a slight bid after the release of the January FOMC meeting minutes.
Summary of the most pertinent headlines:
Economic Outlook:
- Participants noted economic activity had strengthened more than anticipated in 2H 2013
- Although the extent of fiscal policy restraint diminished, several participants noted that temporary factors helped boost real GDP in 2H
- Generally members did not expect recent pace of GDP to be sustained
- A number of participants noted recent economic news reinforced their confidence to project moderate economic growth
- Many also noted recent emerging market developments (if sustained) could pose downside risks to the outlook
- Most participants viewed risks to the economic outlook & labor market as more nearly balanced in recent months
Financial Developments:
- Several participants noted QE taper had not resulted in an adverse market reaction
- Several participants observed market expectations for QE & fed funds rate were reasonably aligned with FOMC’s expectations
- Volatility in EM has had a limited impact on US financial markets
Labor Market:
- A number of participants indicated Dec. payrolls may have been an anomaly (bad weather)
- Some participants said businesses had become more positive about hiring in 2014
- Participants “continued to debate the reliability of the unemployment rate as an indicator of overall labor market conditions”
- Several pointed to the broader concepts of the unemployment rate – Suggest considerable slack in the labor market slack despite un-rate decline
- A number of participants saw the absence of wage pressures as consistent with continued labor market slack
Inflation:
- Inflation remained below the FOMC’s 2% objective over the recent period
- Participants anticipated that transitory factors dampening inflation were likely to recede
- Participants noted persistently low inflation would pose risks to economic performance – Thus, inflation would need to be monitored carefully
Monetary Policy:
- Most participants judged a further reduction to the pace of purchases was appropriate
- A couple raised questions about the desirability of tapering QE, but judged that pausing a reduction of purchases was not currently justified
- Several participants said “there should be a clear presumption” of tapering QE by $10B at each meeting absent an “appreciable change” in the economic outlook
- A number of participants thought FOMC should be prepared to adjustment the trajectory of QE if the economy “deviated substantially from its expected path”
Forward Guidance:
- Participants agreed “it would soon be appropriate” to change forward guidance on rates…given unemployment rate approaching 6.5%
- Some participants favored quantitative guidance (numerical thresholds), while others preferred a qualitative approach
- Several participants suggested FG “should give greater emphasis” on keeping rates low if inflation remains persistently below the FOMC’s 2% objective
- A few raised the possibility that “it might be appropriate to increase the federal funds rate relatively soon.
- A couple noted “standard policy rules tended to suggest” the fed funds rate should be raised before the middle of 2014
- Other suggested “prescriptions from standard policy rules were not appropriate in current circumstances”
Furthermore, key Fed proclamations made earlier today reinforce the view for continued tapering:
- Bullard: Sees steady QE tapering based on positive economic outlook – Outlook would have to worsen significantly to pause tapering
- Lockhart: Despite weak data, taper process to proceed – Expects QE to end by 4Q 2014
- Williams: Hurdle is high for changing the pace of QE taper – “Dramatic” change in the economy or markets would be needed
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