January FOMC meeting minutes signal continued QE taper

The USD caught a slight bid after the release of the January FOMC meeting minutes.

Summary of the most pertinent headlines:

Economic Outlook:

• Participants noted economic activity had strengthened more than anticipated in 2H 2013 
• Although the extent of fiscal policy restraint diminished, several participants noted that temporary factors helped boost real GDP in 2H
• Generally members did not expect recent pace of GDP to be sustained
• A number of participants noted recent economic news reinforced their confidence to project moderate economic growth
• Many also noted recent emerging market developments (if sustained) could pose downside risks to the outlook
• Most participants viewed risks to the economic outlook & labor market as more nearly balanced in recent months

Financial Developments:

• Several participants noted QE taper had not resulted in an adverse market reaction
• Several participants observed market expectations for QE & fed funds rate were reasonably aligned with FOMC’s expectations
• Volatility in EM has had a limited impact on US financial markets

Labor Market:

• A number of participants indicated Dec. payrolls may have been an anomaly (bad weather) 
• Some participants said businesses had become more positive about hiring in 2014 
• Participants “continued to debate the reliability of the unemployment rate as an indicator of overall labor market conditions” 
• Several pointed to the broader concepts of the unemployment rate – Suggest considerable slack in the labor market slack despite un-rate decline 
• A number of participants saw the absence of wage pressures as consistent with continued labor market slack  

Inflation:

• Inflation remained below the FOMC’s 2% objective over the recent period 
• Participants anticipated that transitory factors dampening inflation were likely to recede
• Participants noted persistently low inflation would pose risks to economic performance – Thus, inflation would need to be monitored carefully

Monetary Policy:

• Most participants judged a further reduction to the pace of purchases was appropriate 
• A couple raised questions about the desirability of tapering QE, but judged that pausing a reduction of purchases was not currently justified
• Several participants said “there should be a clear presumption” of tapering QE by $10B at each meeting absent an “appreciable change” in the economic outlook
• A number of participants thought FOMC should be prepared to adjustment the trajectory of QE if the economy “deviated substantially from its expected path”

Forward Guidance:

• Participants agreed “it would soon be appropriate” to change forward guidance on rates…given unemployment rate approaching 6.5%
• Some participants favored quantitative guidance (numerical thresholds), while others preferred a qualitative approach 
• Several participants suggested FG “should give greater emphasis” on keeping rates low if inflation remains persistently below the FOMC’s 2% objective
• A few raised the possibility that “it might be appropriate to increase the federal funds rate relatively soon. 
• A couple noted “standard policy rules tended to suggest” the fed funds rate should be raised before the middle of 2014 
• Other suggested “prescriptions from standard policy rules were not appropriate in current circumstances”

Furthermore, key Fed proclamations made earlier today reinforce the view for continued tapering:

• Bullard: Sees steady QE tapering based on positive economic outlook – Outlook would have to worsen significantly to pause tapering
• Lockhart: Despite weak data, taper process to proceed – Expects QE to end by 4Q 2014
• Williams: Hurdle is high for changing the pace of QE taper – “Dramatic” change in the economy or markets would be needed