FOMC Minutes Preview

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Bank of America expects the FOMC minutes to reveal broad support for the continuation of "measured" tapering, with general discussion around what conditions might lead the FOMC to deviate from a $10bn per month pace, but few, if any, specifics. A small number of Fed officials are likely to express worry about the costs and efficacy of QE, but the majority should see those as less important and focus on signs of continued recovery in the labor market. Forward guidance is likely to have less agreement, with a few members supporting reducing the unemployment threshold, a few favoring no change at all, and several supporting a shift toward a more qualitative approach. We expect the FOMC to drop the unemployment threshold and introduce vaguer but more robust qualitative guidance at their March meeting.

Via BofAML,

The minutes of the January FOMC meeting are likely to reveal a number of debates within the Committee but not necessarily much resolution. Recall that weather was just starting to become a significant potential explanation for a rash of soft data reports, while the turmoil in global financial markets was in full force.

We look for Fed officials to acknowledge some risks to the outlook, but largely view them as short-lived and not moving their expectations for continued improvements in US growth and employment.

On inflation, Chair Yellen's testimony made it clear that the FOMC still isn't particularly worried about the persistently low rate. We expect an active debate all year about cyclical vs. structural sources of labor market weakness and the risks to the inflation outlook.

A number of Fed officials see a significant share of the unemployed as structural, but many others still see some role for monetary policy to offset lingering cyclical forces. A few have suggested that the persistently low inflation means that there may be more slack in the economy than some labor indicators imply.

On policy, we expect the minutes to reveal broad support for the continuation of "measured" tapering, with general discussion around what conditions might lead the FOMC to deviate from a $10bn per month pace, but few, if any, specifics. A small number of Fed officials are likely to express worry about the costs and efficacy of QE, but the majority should see those as less important and focus on signs of continued recovery in the labor market.

Forward guidance is likely to have less agreement, with a few members supporting reducing the unemployment threshold, a few favoring no change at all, and several supporting a shift toward a more qualitative approach. We expect the FOMC to drop the unemployment threshold and introduce vaguer but more robust qualitative guidance at their March meeting. There may be some additional discussion of other ways to strengthen guidance as asset purchases wind down.

Further consideration of the operating procedures during the exit strategy is likely as well, and this too should be an ongoing discussion this year.