Fed minutes scatter the birds and dollar rally sucks wind - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the recently releases FOMC minutes were a confusing set of minutes that say, on the one hand, many want to raise fairly soon, but on the other, many say there is likely to be ample time to respond if signs of rising inflation pressure emerge.

Key Quotes

“Many want to emphasize a gradual rate tightening outlook, but several, it seems, want the Fed to appear more flexible.  There are some hawks that are ready to hike soon and others that might like to hold back until say June.  There are birds of all kinds of a feather.”

“In general, their views haven’t changed much since December, and at that meeting, the majority wanted to hike thrice this year. This throws up an interesting conundrum for timing when most seem to think the Fed prefers to change policy at the quarterly SEP/press conference meetings.  How do you fit three into four?  I mean, if we spread these three hikes over a year, then you hike at in-between meetings (May/July/Nov?).  Maybe the odds of moving at these lesser dates is higher than normal.”

“What does “fairly soon” mean.  It sounds like March or May…June would seem on the fringe of fairly soon.  If the Fed doesn’t like the in-between dates, then it sounds like March.  But if it’s only three this year, March sounds like a Fed stepping up the pace from last year, and getting a bit ahead of the three a year schedule.  The broader tone of the minutes didn’t really suggest any additional urgency to hike since December; gradual remains the buzz word.”

“The change in government is generating heightened uncertainty.  On balance it seems more likely to boost growth and inflation, but there are also downside risks.  Some don’t want to get too caught up in government policy watching and appear more hawkish, some others would like more clarity before rushing to hike.”

“The balance of risks appears to have shifted somewhat more positive, albeit still wide, but several Fed members see further strength in the USD exchange rate as restraining the growth and inflation outlook.”

“The strength in the USD is mentioned four times in these minutes, illustrating that it was raised more often in this meeting than normal, by several members, as an issue that might moderate the need to hike.”

“Business optimism has been given a big boost by possible tax cuts and stripping back regulation.  But the evidence of immediate impact on business investment is more cautious.  This may indicate much depends on the Government to deliver on its tax policy.”

“The Fed is acutely watching the labor market.  Several members are cognizant that it might already be on the verge of becoming too tight.”

“The USD is weaker in response to the minutes, perhaps because the increased mention of the USD exchange rate risks in the minutes resonates with the market.  The strong USD was a factor that appeared to slow the expansion last year. The USD is historically strong and it has failed to build much moment over the last year even as US rates have risen, suggesting its multi-year rally is sucking wind.”

“The market may also be pushing back the scope and timing for the government to deliver on its tax/regulatory/infrastructure policy and instead is getting mired down in immigration and healthcare policy issues.  Furthermore, the administration appears to want a weaker USD.”