The December FOMC statement revealed a lack of agreement among Fed officials over communication, BofAML explains, as evidenced by the complicated extension of the forward guidance language and the dissents from both sides of the hawk-dove spectrum. While Standard Chartered expects the Minutes to show The Fed in no rush to raise rates, Bloomberg Briefs notes they will provide a fresh look at policy makers’ views on three key issues at the moment when they took a crucial step in modifying their forward guidance...
As Bloomberg Briefs explains - here are the 3 key areas of focus...
1) Post-Liftoff Path of Policy
The October FOMC minutes already indicated members’ desire to begin communicating what the path of policy rates might look like following the first rate hike (still expected to be around mid-2015, according to most Fed policy maker speeches). This release is their next opportunity to clarify the Committee’s intentions. Fed Chair Janet Yellen’s comments at the press conference following the December meeting reinforced the idea that more official guidance will be forthcoming. Yellen seized the opportunity to clarify both that a rate hike was unlikely before April and that rates would probably not rise at a steady or “measured” pace after the initial liftoff (as the Fed had previously implemented by raising rates 25 basis points per meeting from June 2004 to June 2006). Just this Monday, San Francisco Fed President John Williams, who will be a voting FOMC member in 2015, indicated that tightening would be “pretty gradual,” suggesting that the pace would be even slower than in the previous tightening cycle. The Yellen Fed’s predilection for sending clear messages about policy planning through its official meeting minutes has already been demonstrated. Look for this release to continue the pattern.
2) How to Gauge Inflation
One of the biggest changes to the December FOMC statement was the inflation commentary, where the Committee appeared to show greater concern about lingering weakness. The statement noted the weakness was due to more than energy prices. It also seemed to suggest that policy makers’ expected timeline for inflation to reach their target has been extended. Indeed, Williams later suggested the FOMC would be willing to raise rates even if inflation remains well below target, as long as the Committee is still confident that it is on course to get there eventually. Inflation may not be heating up, but the debate around it probably will. The last months of 2014 saw Fed policy makers drawing distinctions among various indicators of inflation expectations. Notable among these were market-based measures derived from TIPS (which have declined substantially) and consumer surveys (which have held relatively steady). With the oil-price shock set to drive much of the inflation data in 2015, policy debates will likely focus on how to determine the outlook for 2016 and beyond.
3) International Risks
While the December meeting occurred before the latest headlines about Greece and Russia, the minutes may still shed light on how policy makers are interpreting more recent developments. Thus far, Yellen has been steadfast in downplaying risks to the U.S. economic outlook from stagnant growth in Europe and Japan, as well as a deepening recession in Russia. For first-order effects she looks to be on firm footing, but at some point the Fed may acknowledge secondary effects and the transmission channels it believes could lead to their emergence. Finally, recall that since policy makers did not yet know that third-quarter GDP would be revised up to 5 percent, any concerns expressed about an overheating economy will likely have intensified since the meeting; conversely, worries about lingering slack and low inflation may be marginally reduced.
And the Sell-Side's take...
BofAML's Ethan Harris...
The December FOMC statement revealed a lack of agreement among Fed officials over communication, as evidenced by the complicated extension of the forward guidance language and the dissents from both sides of the hawk-dove spectrum. The minutes may give some insight into how extensive these disagreements are, particularly over the conditions that would allow for liftoff sometime in 2015. As the statement skewed slightly more dovish than expected in December, we expect the minutes to follow. The risk is that they are more reminiscent of the tone of Fed Chair Janet Yellen's press conference remarks, and thus would be seen as somewhat hawkish.
The statement suggested broad agreement among FOMC members that the real side of the economy continues to improve. We look for some debate over just how strong growth would have to be, or how low unemployment would have to fall (and where the NAIRU resides), to warrant hiking rates. The statement also indicated that the FOMC would continue to monitor the inflation outlook; we will look for indications of how deep this concern runs among the Committee - particularly as the median 2015 and 2016 dots declined. Given the volatility heading into the December meeting, we do expect more discussion of global economic, geopolitical and financial market risks than in the statement. If these risks are downplayed as in the October minutes, that would be mildly hawkish.
The retention of the "considerable time" phrase even as a "patient" approach to policy was added suggests the Committee could not agree on changes to the guidance language. Explicitly noting the equivalence of the two suggests significant concern of an undesirable market selloff. We expect an active debate over communication in the minutes, which may give some indication of how the Committee will modify the guidance going forward. Discussion over the conditions that would warrant rate hikes will be notable as well. The October minutes also suggested some desire to give more clarity over the likely pace of hiking; any such comments would be noteworthy.
With the changeover in voting members at the January meeting, we suggest giving somewhat more weight to the discussion among the full set of participants in December than just the voting members as usually is appropriate. The 2015 voters also lean more dovish, suggesting more caution than usual when interpreting hawkish remarks in the minutes.
Standard Chartered... FOMC Minutes to Show Officials in No Rush
Minutes are “unlikely to bring a fresh perspective on the Fed’s thinking,” may not add much value to Dec. 17 statement, Standard Chartered economist Thomas Costerg writes in note.
- Fed minutes may look “stale” given further drop in oil prices, rising political uncertainty
- Standard Chartered sees Fed “entrenched in wait-and-see mode,” doesn’t expect rate increase before Sept.
- Main risk is that minutes show more worry about uneven global growth, negative implications of rising USD
- Standard Chartered maintains positive USD outlook, sees potential risks to USD; sustained equity weakness is biggest threat to USD rally
Jefferies... Fed Minutes to Show ‘Lively’ Discussion on Guidance
Minutes of FOMC’s Dec. 16-17 mtg will reflect “lively, if sanitized” discussion on changing forward guidance on rates to “patient,” Jefferies economists Ward McCarthy, Thomas Simons write in client note.
- Context may also be given for Yellen’s view Fed is unlikely to act for at least 2 mtgs
- There’s potential for wide range of opinions on message Fed should be sending, given three dissents in last statement
- Deteriorating inflation picture has put policy makers in difficult position; readings are moving further away from 2% as labor mkt improves
- One question that may appear in minutes is whether full employment, price stability are equally important
UBS: FOMC Minutes May Show Fed Inflation Focus Intact
Minutes of FOMC’s Dec. 16-17 mtg “could upset market perceptions of what is important to the Fed’s decision-making process,” UBS economists Drew Matus, Maury Harris write in note.
- Yellen comments that Fed won’t raise rates for next “couple” of meetings suggests “wide-ranging discussion” about timeline of increases
- UBS sees fed funds rate of 1.25%-1.5% at yr end
- Discussion on overseas events will be limited to impact on U.S. economy, not effects of higher U.S. rates on global economy
- FOMC members voting in 2015 will “likely result in a modestly more dovish-sounding committee and less dissent”
- Fed Board nominee Allan Landon will likely be “neutral” voice if confirmed, though “his background in community banking could mean he would be more concerned about the Fed’s large balance sheet and extremely low interest rates”
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In case "the market" misunderstands... Shortly following the release of the FOMC minutes on Wednesday afternoon, voting member Chicago Fed President Charles Evans speaks on monetary policy, and his comments may color the immediate interpretation of the minutes.
