FOMC minutes: full review - Nomura

Analysts at Nomura explained their review of the FOMC minutes.

Key Quotes:

"The minutes from the 26-27 April FOMC meeting read more hawkish than we had anticipated. The Committee seemed skeptical about the slowdown in economic activity to start the year. Although the Committee acknowledged that economic activity had slowed, many participants looked through the weak data citing potential measurement issues for Q1 economic data.

The Committee also noted that financial conditions had improved significantly over the intermeeting period. Participants generally agreed that easing in financial conditions would support domestic economic activity and had reduced the downside risks to the economic outlook. In addition, the Committee acknowledged that risks associated with global developments had diminished over the intermeeting period, leading to the removal of the key phrase “global economic and financial developments continued to pose risks” from its policy statement.

The minutes also showed that the Committee is prepared to raise rates at the June FOMC meeting as long as the incoming data cooperate with its outlook. In the “Participants’ Views on Current Conditions and the Economic Outlook” section, it stated: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.” Economic data have turned around since the April meeting. Core retail sales rose by a better-than-expected 0.9% in April, making up for some of the weak consumer demand in Q1. Vehicle sales rebounded nicely in April following a disappointing March performance and consumer sentiment brightened in the first half of May. Currently, our GDP tracking model estimates that the economy is likely expanding around 2.3% in Q2. Also, CPI inflation remains on track to gradually increase over the year.

Moreover, the minutes from the April FOMC meeting showed that the Committee viewed the risks from financial conditions as having diminished since earlier in the year. Also, regional Fed Presidents Lockhart and Williams reiterated that they see two to three rate hikes this year as a possibility, pushing back against market expectations that the Committee will again delay raising interest rates in June. Taking the minutes and these developments into account, we think that the likelihood of a June hike has gone up. However, we still believe that the most likely timing of the next rate hike is September.

Although recent economic data have rebounded nicely, it’s unclear whether or not the momentum can be sustained and there are only a few weeks left for the Committee to confirm before the next policy meeting. Also, on inflation, several participants still viewed the risks as skewed to the downside. Last, there are still global downside risks that may alter the path of policy."