What To Look For In Today’s FOMC Minutes

Last month, the Fed made dovish tweaks at its January meeting, and with the FOMC now firmly in “data-dependent” mode, discussion on the balance of risks will be key; additionally, markets will be keeping an eye out for any clues that there is a consensus on the FOMC to halt its balance sheet run-off this year.

Here is what traders will be looking for heading into today’s Fed minutes, courtesy of RanSquawk

MEETING RECAP: Heading into the FOMC’s rate decision and statement, the market was looking for an update on the balance sheet, whether the Fed would maintain a “gradual” pace of rate hikes, whether it judges the balance of risks as “roughly balanced” and whether it revises its assessment of the economy.

All of those factors saw dovish tweaks in the latest statement:

  • on the balance sheet, the FOMC indicated that it was prepared to adjust the pace of the balance sheet run-off, it dumped language on “gradual” rate hikes, adding in that the Committee will be “patient” on future hikes.
  • The language around “roughly balanced” risks was also dumped, and it downgraded its view of the economy slightly, now characterising it as “solid” from “strong”.
  • The Fed also changed its view on inflation, which it now sees as “muted”.

There were some fears among traders that the Fed might not be as dovish as hoped for; that fear was jettisoned with the release of the statement, and the dovish Fed saw risk assets bounce higher.

POWELL PRESS CONFERENCE: In the press conference, Chair Powell sounded upbeat on the economy, reiterating his now familiar message of data-dependence and patience. He did note cross-current headwinds from the slowdown in Chinese and European growth.

On rates, Powell said the case for raising rates has weakened somewhat. On the balance sheet, Powell said the policy will be driven by reserve demand, which he suggested was higher than it was a year ago. He also suggested that it was still not the Fed’s primary tool of normalization, that remains rates, though the balance sheet could be used if required (he later said that in a future downturn, the balance sheet would be used to stimulate the economy, but after using rates).

He was quizzed about the ideal size of the balance sheet, though he dismissed the question, suggesting the size will be whatever is most efficient to implement the Fed’s policy. Powell said rates were now in the range of estimates of neutral; previously he had seen them in the bottom end of the range of the estimates neutral. On the government shutdown, Powell said that it would leave an “imprint” on Q1 growth, though much of that would be made up in the Q2. On trade talks, Powell said that drawn out negotiations could weigh on business confidence.

WHAT TO LOOK FOR IN THE MINUTES: In 2019, Fed officials have pivoted away from seeing two hikes this year (in the December projections), to a patient, data-dependent approach. Currently, markets are pricing a flat rate hike trajectory, and sees a possibility of rate CUTS next year. Accordingly, traders will be attentive to commentary around the balance of risks, to see if FOMC members believe that risks have materially shifted to the downside. “Although Chair Powell in subsequent remarks continued to note that the economy entered the year on solid footing, several officials since have remarked that slowing global growth, tighter financial conditions, and the lagged effect of prior rate hikes could combine to slow growth by more than the Fed expected,” SocGen writes.

Naturally, comments around the balance sheet will also be eyed. There are risks that the minutes will not reveal anything materially new on the balance sheet, in terms of when the Fed plans to end the run-off policy, however, SocGen says that the minutes may give some clues on whether the central bank sees the run-off ending this year, as was suggested by Fed Governor Lael Brainard last week.

Additionally, even some of the more hawkish on the FOMC, like Loretta Mester (non-voter), have suggested that she’d be comfortable with slowing – or even halting – the pace of reinvestments of maturing securities in 2019. Mester added that if it were her choice alone, she’d favour slowing reinvestments of maturing securities, and suggested that her preference would be for the Fed to hold primarily Treasuries, with a bias towards shorter-dated securities.