FOMC Minutes: Rate hike coming fairly soon, in June? - Rabobank

According to Philip Marey, Senior US Strategist at Rabobank, the minutes of the FOMC meeting of January 31 and February 1 support Yellen’s suggestion last week that the upcoming meetings are ‘live’ meetings.

Key Quotes

“Many participants expressed the view that it might be appropriate to raise the federal funds rate again ‘fairly soon’ if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased. However, the minutes also showed that the Fed is not in a hurry.”

“Many members continued to see ‘only a modest risk’ of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly. These members expressed the view that inflation was likely to rise toward 2 percent gradually, and that policymakers would likely have ample time to respond if signs of rising inflationary pressures did begin to emerge. What’s more, the minutes also showed that the debate about reducing the Fed’s asset portfolio is yet to start at upcoming meetings. On balance, a bit more dovish than some in the markets had expected if we look at the immediate drop in US treasury yields.”

“Once more the minutes revealed how dependent the Fed has become on President Trump’s economic policies. Participants again emphasized their considerable uncertainty about the prospects for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes on economic activity. Most participants thought some time would likely be required for the outlook to become clearer.”

“A couple of participants argued that such uncertainty should not deter the Committee from taking further steps in the near term to remove monetary policy accommodation, because fiscal and other policies were only some of the many factors that were likely to influence progress toward the Committee's dualmandate objectives and thus the appropriate course of monetary policy. However, other participants cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated. Coincidentally, starting with the minutes of the next meeting, the Fed will also start to add fan charts to the quarterly economic projections that will (further) illustrate the uncertainty of the FOMC participants.”

… in June? 

“Since the March meeting will come too early to assess the fiscal policy plans of the new administration, and the May meeting does not include a scheduled press conference, we therefore think it is more likely that the FOMC is aiming for June again. If the economic data continue to point at sustained momentum by mid-June and if there are no threats to the US economy from overseas – such as adverse developments in China or Europe − or from Trump’s trade policies, the Fed is likely to hike on June 14. However, we still think that the probability that all these conditions are met is lower than 50%. Note that last year the Fed was ready to go in June as well, but it took only one bad Employment Report in early June to derail that plan. With fiscal policy effects on the economy likely to lag, we expect the negative fallout from US trade policies and global weakness to prevent a June hike. For now, we stick to our December call, although the risks to our forecast are predominantly to the upside.”