FOMC Minutes to take centre stage this week - BBH

Analysts at BBH note that the Federal Reserve will release the minutes/record of its most recent meeting this week in which the FOMC meeting was as much of a non-event as its meetings can be, with no forecast updates, press conference, or new initiatives.

Key Quotes

“Perhaps the most interesting thing about the November 1 FOMC meeting is that Powell knew he would be nominated to be the next Chair, though Yellen apparently did not.”

“A debate over the extent that the Fed's reduction of the balance sheet will tighten financial conditions has emerged.  Many argue that the $450 bln reduction of the Fed balance sheet envisioned by the end of next year is tantamount to 100 bp hike in the Fed funds rate.  We respectfully demur.”

“The difference in views stems from a disagreement on how the asset purchases worked.  Given that US Treasury yields fell on the announcement and rose on the actual purchases underscores, in our mind, the important of the signaling channel for impact as opposed to the material impact.  This is not so much a resurrection of the debate over flows (purchases) versus stock (holdings) as it is an appreciation of the significance of official communication.  In recent speeches, central bank officials seemed to acknowledge this and give credence to our emphasis.”

“That said, where we do agree is that investors may be underestimating the extent of Fed tightening in 2018.  This is not because of the balance sheet effects, but because we expect the Fed to raise rates two or three times in 2018, while the market has a little more than one discounted.  A Reuters survey found that most economists it surveyed expect the Fed to hike rates twice next year, which is somewhere in between what the market is discounting and what the Fed's forecasts suggest.”