FOMC Minutes Preview: The Risk Is Of A "Less Hawkish" Tilt

The FOMC September meeting minutes will be published on 17 October 2018 at 2pm ET, when the Fed hiked by 25bps and removed the "accommodative" language, which was initially seen as dovish, but subsequent hawkish comments by Fed Chair Powell, according to which the Fed could "overshoot" the neutral rate, which is still "far away" spooked interest rates and prompted a spike in the 10Y yield. As such, Nomura's Darren Shames believes that "…the risk is that the minutes give a less “hawkish” impression than some of Powell’s (and several other Fed members) recent remarks."

Here's what else to expect in today's minutes, courtesy of RanSquawk

RATE/NEUTRAL RATE: FOMC hiked rates by 25bps at its September meeting, as was expected, and removed the reference in its statement that policy is 'accommodative'. Forecasts were little changed, though the central bank's new dot sees rates at between 3.25-3.50% in 2021, matching the level of its 2020 projection, hinting that the FOMC has put a soft end-date to its hiking cycle. Additionally, it appears that the FOMC does not intend to raise rates above its estimate of neutral (the broadest estimate of the Fed's neutral rate range, determined from FOMC speakers over the past few months, is between 2.50-3.50%). In his press conference, Powell endorsed a gradual approach, and noted that some participants saw a moderate overshoot of neutral rate.

FED INDEPENDENCE: On the central bank’s independence, he claimed the Fed does not consider political factors when deciding policy as it focuses on the mandate, following the recent criticisms of US President Trump. Some argued that the Fed's chair Powell tilted hawkish in a recent moderated discussion as a shot across Trump's bow, a defiant move to signal the Fed's independence. (Powell said "interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral," and added that "[the FOMC] may go past neutral. But we’re a long way from neutral at this point, probably" - comments which were taken as hawkish by rates traders). However, SGH Macro are dismissive of this view: "We do not think his remarks were meant as a hardening per se of a hawkish messaging on the Fed's already presumed base rate path. He was instead delivering pretty much the same message but speaking to a more lay audience," SGH says, adding "Powell in fact has made a point of not only speaking in plain English but also reaching to a wider public than the markets or any particular tweeters.

FORWARD GUIDANCE: Related to the neutral rate and staff economic projections, UBS says there will likely be discussion of its intention of dialing back forward guidance, "that theme has come out in Powell's speeches, but may increasingly show up more broadly," UBS says.

US ECONOMY: At his press conference, Powell sounded upbeat about US economic prospects, defining this as a particularly bright moment for the US economy. Powell noted dropping the 'accommodative' language was a sign that monetary policy is proceeding in line with the Fed's expectations, and does not signal a change of the rate path. He however noted that if inflation surprised to the upside, the Fed would have to move quicker, but stressed he did not see that happening; similarly, a slowing down in the economy or in the financial conditions is something the Fed would react to, Powell said.

TRADE WARS: Powell said trade was a downside risk, though the effects of trade tensions have been relatively small so far. The Fed chair referred to the recent Beige Book, which contained many references to difficulties agents were facing on the back of trade relations. In terms of the inflationary impact, Powell said tariffs might provide a basis to companies to raise prices, while noting the uncertainty that trade still represents.

BALANCE SHEET: HSBC will be keeping an eye on comments relating to balance sheet policy after the FOMC's August meeting minutes stated that the central bank will begin discussions on its balance sheet policy in the fall. "A drift upward in the federal funds rate within the FOMC's target range suggests that bank reserves are becoming less abundant, raising questions about how long the Fed can go on reducing its balance sheet," HSBC said.