4 Takeaways from the April FOMC Minutes

Greetings, forex friends! The minutes for the April FOMC meeting got released yesterday, and the Greenback reacted by spiking higher. What gives? Well, let’s take a closer look at the details of the FOMC meeting minutes, shall we?

1. More FOMC members wanted a rate hike, but…

According to the FOMC meeting minutes, a “few participants” wanted a rate hike in April. In contrast, only a “couple of participants” were calling for a rate hike during the March FOMC meeting. However, most of these participant probably weren’t voting FOMC members because only Kansas City Fed President Esther L. George voted for a rate hike then and there.

FOMC members vote

Also worth noting is that a “couple of participants” were worried that delaying another rate hike “might confuse the public about the economic considerations that influence the Committee’s policy decisions and potentially erode the Committee’s credibility.” In simpler terms, these FOMC members were worried that the market would lose confidence in the Fed, and by extension, the U.S. banking system as a whole.

Also, “some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.” In plain vanilla English,  some Fed officials were worried that the market is betting heavily that a June rate hike is likely not in the cards, which further highlights the Fed’s desire not to lose credibility.

2. June rate hike seems likely, but…

The Fed failed to provide forward guidance during the April 27 FOMC statement, but they made up for it in yesterday’s release of the FOMC meeting minutes since it was revealed that most FOMC members thought that it “would be appropriate for the Committee to increase the target range for the federal funds rate in June.

However, a June rate hike would only be warranted “if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective.”

3. “Many” still worried about global developments

FOMC members generally agreed among themselves that risk from abroad have receded somewhat, but “many participants” noted that global developments “still warranted close monitoring.”

In terms of specifics, “some participants” expressed their concerns on the possible impact of the Brexit referendum on global financial markets, as well as China’s manipulation, er, I meant to say management of its currency.

4. “Several” are worried about financial stability

It is interesting to note that “several” Fed officials were worried about “vulnerabilities in the financial system,” as the FOMC meeting minutes puts it, which includes “rapidly rising prices” of commercial real estate and the lack of liquidity of some mutual funds (among others).

Still, there were apparently no signs of any problems yet and the Fed does not expect that they will become a problem in the near future. Nevertheless, “participants generally agreed that the Committee should not completely rule out the possibility of using monetary policy to address financial stability risks.” In addition, “participants stressed the need for further research and analysis to advance understanding of the relationship between monetary policy and financial stability and to help identify situations in which it might be desirable to incorporate financial stability considerations in the design of monetary policy.”

Hmm. The Fed is not expecting any financial stability problems but discussed the possibility of using monetary policy to address financial stability risk and also wants to incorporate financial stability in future monetary policy decisions. Kinda weird, if you ask me.

Summary

To sum it all up, the FOMC minutes revealed that Fed officials are very open to a June rate hike, as long as economic data supports a rate hike. And the Fed specified three economic conditions, which are as follows:

  • a pickup in Q2 growth (so retail sales, trade data, etc. would likely be market movers)
  • improving labor market conditions (there’s still one NFP report before the June FOMC meeting)
  • stronger inflation readings

Inflation would probably be the main economic indicator to watch out for because a “number of participants” were particularly worried about hiking the Federal funds rate too soon because inflation remains weak and risks to inflation are still “tilted to the downside.”

There were also some rather disconcerting talks about needing to hike rates in order not to lose credibility and rhetoric that there are no major financial stability risks while talking about using monetary policy to address financial stability risk, but these were apparently just shrugged off by the market.