The freshly-released FOMC meeting minutes revealed that Fed officials said pretty much all they had to say during last month’s monetary policy statement, giving most forex market watchers the impression that they don’t know what’s next for the economy or monetary policy either. What do you make of these key points?
1. Unlikely to hike rates next month
Just when you thought that Yellen was just being her usual cautious self during the actual FOMC statement, the transcript of their top-secret huddle revealed that Fed officials are likely to have black smoke coming out of the chimney again in June. That’s not really much of a surprise, considering how forex participants have dumped their June rate hike expectations around the time the U.S. economy started showing signs of a slowdown, but I guess it’s still a pretty big deal to hear it from the FOMC members themselves.
While the committee didn’t completely chuck the possibility of a June rate hike out the window, they mentioned that it’s unlikely that the data available by then would be enough to convince them to tighten monetary policy. A quick scan of the forex calendar shows that the U.S. has its CPI, preliminary GDP reading, core PCE price index, NFP report, and retail sales data lined up ahead of the June FOMC statement. Given the recent slump in the U.S. economy, I’m guessing Fed officials will need at least a couple of months’ worth of new data to gauge whether or not the slowdown was really transitory.
2. No forward guidance on tightening
Forward guidance refers to the Fed’s communication strategy of giving strong hints on when they might alter monetary policy. Without any forward guidance on tightening, Fed officials see no problem in allowing forex traders to play guessing games.
Those counting on a Fed rate hike sometime this year say that the removal of the word “patient” in the latest FOMC statement suggests that tightening is bound to take place within a few months, as this has been a pattern in previous Fed decisions. However, FOMC officials did say that they would proceed on a meeting-by-meeting basis, which basically means that forex traders won’t see a rate hike coming until the actual announcement itself.
Some analysts say that this is a sign that even Fed officials themselves don’t have a clue on when they might hike interest rates, which explains why they’ve been giving mixed signals on their policy biases. Then again, I wouldn’t blame them for being all over the place since the U.S. economic outlook is still clouded with a lot of uncertainty. I mean, you’ve got oil prices facing another potential slide, Greece is still flirting with the possibility of a debt default, China’s troubles could wind up dragging the rest of the global economy down, and American Idol is over!
3. Growth and inflation outlook upgraded
Interestingly enough, FOMC members still retained their glass half-full outlook for medium-term economic performance, as they revised their growth and inflation forecasts higher. In particular, the staff felt the need to upgrade their trade activity estimates, as the recent dollar depreciation probably made U.S. exports more affordable in the international market. Anybody take advantage of this to buy the Apple Watch?
Fed officials also noted that statistical quirks in government data tend to skew first-quarter growth figures to the downside. “This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year,” the minutes showed.
4. Concerns about bond yields
It seems that Fed officials are starting to grow concerned about the potential impact of a rate hike (See, they’re really considering it!) on other financial markets. As it turns out, a part of their discussions focused on how higher interest rates might affect the bond market and how this might trigger a sharp spike in yields.
You see, higher bond yields could prove to be troublesome for the economy since this phenomenon gives an additional boost to borrowing costs. Right around the time the Fed started talking about tapering their bond purchases nearly a couple of years ago, bond yields rose so sharply that mortgage rates also jumped and spurred a slowdown in the housing market. FOMC members worried that a repeat of this “taper tantrum” could drive market interest rates so high that the recent progress in business investment and consumer spending might be erased.
This probably explains why the Fed is being a little more careful about sharing more details on their tightening plans this time around. At the end of the day though, the Fed still remains the only major central bank more or less likely to hike interest rates this year, provided that the U.S. economy gets back on track with its recovery.