FOMC Minutes: Dovish but (still) data-dependent Fed leaves rate hike door open

In yesterday’s preview report, we highlighted how traders might look at today’s FOMC minutes as staler than Grandma’s cereal after the market volatility and mixed economic data we’ve seen over the last three weeks . As it turns out, Federal Reserve members has a bit of a dovish lean even back in January. Some of the key headlines from today’s FOMC minutes follow [emphasis mine]:

• FOMC MEMBERS AGREED DATA TOO UNCLEAR TO GAUGE RISKS TO OUTLOOK
• FED OFFICIALS CONTINUED TO EXPECT GRADUAL POLICY TIGHTENING
• MANY FED OFFICIALS AT JANUARY FOMC MEETING SAW INCREASED DOWNSIDE RISKS
• A NUMBER OF FED OFFICIALS CONCERNED BY DRAG ON U.S. FROM CHINA
• MOST OFFICIALS SAW ‘SOLID’ LABOR MARKET, THOUGH SEVERAL SAW MODERATION
• USD AND OIL WERE SEEN AS UNLIKELY TO HOLD DOWN INFLATION FOR LONG
• MOST FED OFFICIALS SAW INFLATION RISING TO 2% OVER THE MEDIUM TERM
• OFFICIALS STRESSED TIMING OF HIKES WOULD DEPEND ON DATA

Summarizing the minutes, it appears that the FOMC members thought that the level of uncertainty in the economy had increased, arguing for a more cautious path for monetary policy (read: slower interest rate increases) moving forward. Of course, the market was already doubtful of another rate hike in 2016 whatsoever, so this conclusion will hardly serve as a major paradigm shift.

Indeed, as “Fed Whisperer” Jon Hilsenrath noted, “Declining stock and oil prices, doubts about China, indications of declining inflation expectations in markets and other factors left officials split in two camps—those who believed that risks to the economy were materializing and those who wanted to wait and see.” Taking into account the Fed’s repeated “data dependent” mantra, there’s absolutely still a chance that the central bank could raise interest rates this year (perhaps even as soon as June) if we see signs that China’s economy, the oil market, and inflation expectations are all firming up.

Market Reaction: Muted

As we noted above, the minutes were generally stale and stereotypically inconclusive, so the market reaction thus far has been muted. The US dollar initially dipped after the release, with EUR/USD jumping 20 pips to 1.1155 and USD/JPY dipping below 114.00, but both those moves have since been unwound and the dollar is trading slightly above pre-release levels. Meanwhile, US equities are extending the day’s gains while the benchmark 10-year bond yield hits new daily highs at 1.84% as we go to press. With no earth-shattering new epiphanies from the world’s most important central bank, these initial moves may carry on for the rest of the day and perhaps the rest of the week as well.