FOMC minutes: Fed outlines QT principles and expects to hike 'soon'
|On the rate hike outlook, 'most participants' (both covering voting and non-voting FOMC members) think a rate hike will be appropriate 'soon'.
However, the Fed admits it is in a difficult position due to the combination of a strong labour market and inflation still below 2%.
Consensus is that the Fed will hike at the June meeting, but we are still more sceptical because of both the weaker economic data and still too low inflation. However, we just expect the Fed to wait until July so would not be a big surprise if the Fed hikes in June.
We now expect the Fed to hike three times next year (previously 3-4 times) due to a combination of the Fed's desire to shrink its balance sheet soon and Trump's inability to deliver on Trumponomics.
'Nearly all' FOMC members think it would be appropriate to begin quantitative tightening later this year.
The Fed staff proposes that the FOMC announces a set of gradually increasing caps/limits on the dollar amounts of bonds that will be allowed to run off each month and only reinvest the amounts that exceeded the caps each month.
The minutes also say that the FOMC members agreed to amend Committee's Policy Normalization Principles and Plans "soon".
We think this supports our view that the Fed will come with the big announcement of the triggers for starting quantitative tightening in connection with the June meeting.
We have written extensively about quantitative tightening and implications for financial markets this year. For links open analysis and on the bottom page 2.
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