FOMC Meeting Minutes Preview: Hawkish on hikes but terrified on trade?

The Federal Reserve releases the FOMC Meeting Minutes on Wednesday, April 11th, at 18:00 GMT. The document is set to unveil more details about the internal deliberations before the Fed Chair Jerome Powell raised interest rates in his first meeting at the helm. 

The event that took place on March 21st also consisted of new forecasts, including the closely watched dot-plot. The Fed did not raise the projection for 2018 and left it at three hikes while boosting the outlook for 2019, 2020, and also the long-term. Markets reacted to the no-change for 2018 more than anything else. The US Dollar dropped, and stocks cheered at this "dovish hike." 

After the upbeat data, the Fed could be hawkish on hikes

But was it really so dovish? Even if we focus only on 2018, there was only one more missing dot for four hikes in 2018. It was a close call and the Minutes may show us where the wind is blowing.

Since the meeting, we learned that wages are rising at an annual pace of 2.7% against 2.6% beforehand. Also, the Core PCE Price Index, the Fed's favorite measure of inflation, ticked up from 1.5% to 1.6%. Both figures met early expectations, but they served as good news about the missing piece: inflation.  Despite robust growth (Q4 was recently upgraded to 2.9% annualized) and upbeat job growth (Q1 2018 was a great quarter despite seeing only 103K in March), prices are not rising. The increase in both inflation and wage inflation is encouraging.

Both figures came out after the Fed decision and may not be reflected in the document. Nevertheless, it is important to remember that the FOMC Minutes are redacted until the very last moment and may be modified to set a more upbeat tone, a tone that matches the recent data.

Given the fact that the vote on upgrading to four hikes was close, a slightly more hawkish tone could convince markets that a fourth rate hike is very much in play and the US Dollar could enjoy this.

But trade fears may also be expressed

When answering a question on tariffs, Powell said it was not incorporated in the decision, but that business contacts did express concern about those steel and aluminum tariffs. That was the only mention of the topic that continues dominating the headlines with growing fears of trade wars.

Since March 21st, things have indeed deteriorated. The US announced further tariffs and Chinese goods; China announced its counter-tariffs and Trump tweeted about new ones. While there were some occasional soothing words from the President and other senior officials, clouds continue looming. The report about China contemplating a devaluation of its yuan scares markets and may easily anger Trump.

Will the minutes unveil greater fears within the Federal Reserve? San Francisco Fed President John Williams has already said this is of concern. He will soon hold a more senior position as the President of the New York Fed and a permanent voter in the Committee.

Have others also voiced worries about tariffs, protectionism, and isolation? If so, the Fed is watching the space carefully and any move that threatens growth may see a response. If the Fed fears of a slowdown related to trade wars, it may hesitate before hiking, and the  US Dollar may fall. 

While the Meeting Minutes may reflect the thought that the government's tax cuts and spending may boost growth, markets will focus on any comments related to trade, the No. 1 topic. 

Conclusion

As with the first rate decision from Powell, the first FOMC Meeting Minutes may be different and are set to offer higher volatility. The comments on inflation and trade are the most critical ones to watch. It all depends on which theme has the upper hand.

More: EUR/USD looks to US-China, FOMC, ECB – Danske Bank