Amid all of the confusion stemming from the December dissents and disinformation, the hope was that the Minutes might add some color on global risks, inflation, and lift-off timing.
- *FED OFFICIALS SAW RATE RISE UNLIKELY BEFORE APRIL, MINUTES SHOW (Patient)
- *MANY ON FOMC SAW DOWNSIDE RISKS TO U.S. FROM GLOBAL WEAKNESS (Fear)
- *FOMC SAW OIL, DOLLAR MOVES TEMPORARILY PUSHING INFLATION LOWER (Transitory)
So The Fed is positive (jobs, US Econ), negative (global risk contagion), and neither (everything's transitory).
Pre-FOMC Minutes: S&P Futs 2018.5, 10Y 1.97%, Gold $1210, WTI $48.16
Sticking to the narrative:
- *FOMC SAW CHEAPER ENERGY COSTS AS NET POSITIVE FOR GDP, JOBS
- *FOMC SAW ECONOMY EXPANDING AT MODERATE PACE, SOLID JOB GAINS
- *MOST ON FOMC SAW NO CLEAR EVIDENCE OF BROAD WAGE ACCELERATION
- *FOMC: DOWNSIDE INTL RISKS `NEARLY BALANCED' WITH UPSIDE RISKS
- *FOMC STRESSED TIMING OF FIRST RATE RISE TO DEPEND ON NEW DATA
- *FOMC SAW `PATIENT' GUIDANCE AS GIVING MORE POLICY FLEXIBILITY
Hoping for a raise? Keep hoping:
... most participants saw no clear evidence of a broad-based acceleration in wages...
Here is the Fed's definition of "patient" (we already know what couple means):
Most participants agreed that it would be useful to state that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy; they noted that such language would provide more flexibility to adjust policy in response to incoming information than the previous language, which had tied the beginning of normalization to the end of the asset purchase program. This approach was seen as consistent, given the Committee’s assessment of the economic outlook at the current meeting, with the Committee’s previous statement. Most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings.
And yet some were concerned this may box the Fed:
Some participants regarded the revised language as risking an unwarranted concentration of market expectations for the timing of the initial increase in the federal funds rate target on a narrow range of dates around mid-2015, and as not adequately allowing for the possibility that economic conditions might evolve in a way that could call for either an earlier or a later liftoff date.
The Fed's discussion of markets:
In their discussion of financial market developments, participants observed that movements in asset prices over the intermeeting period appeared to have been importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan. A couple of participants remarked on the apparent disparity between market-based measures of expected future U.S. short-term interest rates and projections for short-term rates based on surveys or based on the median of federal funds rate projections in the SEP. One participant noted that very low term premiums in market-based measures might explain at least some portion of this gap.
Blashphemy: the market saying the Fed may be wrong?
Another possibility was that market-based measures might be assigning considerable weight to less favorable outcomes for the U.S. economy in which the federal funds rate would remain low for quite some time or fall back to very low levels in the future...
Fed finally admits that oil is, lo and behold, plunging:
With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.
.... And may have even led to a decline in longer-term inflation expectations, as in deflation?
Some participants were worried that the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations, while others were concerned that the decline in market-based measures of inflation compensation might reflect, in part, that such a decline had already begun.
But the punchline, and the Fed's loophole as well as the hint at how Yellen will punk Eurodollar traders once again: blame the "international situation":
Participants discussed a number of risks to the economic outlook. Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient. However, the downside risks were seen as nearly balanced by risks to the upside.
Then again, this is the Fed: the one place where 7 years if ZIRP is clearly not enough to make any conclusions:
participants generally agreed that it would take more time and analysis to draw definitive conclusions
Full minutes (pdf [5])
