Traders Cautious Ahead of FOMC Minutes

We’re seeing plenty of caution ahead of the open on Wall Street on Wednesday as investors eye the FOMC minutes for further clues on the timing of the first rate hike.

Since removing its forward guidance earlier this year, the Fed has offered very little insight into when that first rate hike will come and that is making investors quite anxious, particularly around these kinds of releases. The Fed has claimed any rate hike will be data dependent which doesn’t offer the kind of transparency than we’ve had in the past.

They haven’t made it clear what they’re looking for when they say they waiting for further improvement. This leaves a lot up to interpretation and naturally, people coming to very different conclusions. The impression I get is that the labour market is strong enough, the worry is productivity and wage growth which ultimately impacts the inflation outlook. If the Fed start to see evidence that productivity is improving then wages should improve and inflation hit its target within the forecasting period. As a result, I think a rate hike will come this year, possible still in September.

Others have interpreted the Fed’s comments very differently though and instead point to the strength of the dollar, retail sales figures and the first quarter slowdown as why the Fed will delay the rate hike until next year. The problem with this is that, as the Fed stated, the first quarter appears to have been transitory. We saw a poor first quarter last year, even poorer than this year by current measures, and that did not halt the recovery for the rest of the year. Retail sales should pick up, even more so now given the increased savings rate in the first quarter and the delayed boost of low oil prices.

The Fed needs to provide more clarity and this may come from the minutes today, although I doubt it. If it wanted to do so, it would have already. I don’t think it wants to commit to anything and risk causing any major market disruptions or do a U-turn and lose credibility. It wants to remain flexible.

Comments from one of the more dovish members, Charles Evans, today suggests to me that a rate hike this year remains more likely. He argued the case for hanging on until the start of 2016 but if he is among the more dovish, that would suggest the consensus is still a 2015 hike. He did claim that inflation is too low and they should seek further confidence that it will hit 2% in the next two years, which supports my earlier point that certain measures are far more important than others that are impacting people’s forecasts more than they should. He also suggested that they could look to hike rates in June which puts this year firmly in pole position in my view. June would be completely off the table if most economic indicators were not supporting a hike.

The S&P is expected to open 1 point lower, the Dow 1 point higher and the Nasdaq 1 point higher.