FOMC Minutes Preview: Is There Any Dovishness Left

Submitted by RanSquawk

Meeting Recap

The FOMC November minutes, which will be published at 2pm ET today, reference the Fed's Nov. 7-8 meeting in which the FOMC kept rates unchanged at 2.00-2.25% as was widely expected. The statement was little changed, though the central bank amended its categorization of household spending and business investment, saying that "household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year" (previously, it said that "household spending and business fixed investment have grown strongly").

"This downgrade reflects the softness of Q3 capex in the GDP accounts, which showed business fixed investment rose at a mere 0.8% annualized rate, slowing sharply from the 8.7% Q2 jump," Pantheon Macroeconomics said, "we think this is noise rather than signal, and we also think the Q2 number likely will be revised up," arguing that strong earnings growth, rates which remain low as well as a need to rebuild and renew the capital stock should keep capex rising at a decent rate.

Pantheon was slightly surprised that the Committee did not allude to the recent slide in stocks, though it notes that the rally over the week preceding the meeting meant that there was little impact on financial conditions, and the consultancy says that if that remains the case in December, then a fourth 2018 rate hike is a done deal, but adds that what it wants to see is how the FOMC's thinking process evolves in the first months of 2019 if the labor market continues to tighten, and wages continue to rise.

With that said, the market interpreted the FOMC's decision as hawkish, given the lack of concern expressed with regards to stocks sliding; analysts at Goldman Sachs have said that the Fed is likely to ignore the stocks slide until both credit spreads (which have been blowing out) and growth (which is running above trend) signal stress, arguing that the Fed will approach a data-dependent line towards these risks.

In terms of the IOER, some had expected the FOMC to signal a potential cut to the rate (currently 2.20%), and although this was not directly mentioned in the statement; there will be attention on the minutes for any clues.

Fedspeak

There has been much attention on the recent tone of Fedspeak; Fed chair Powell and vice chair Clarida have in recent speeches highlighted the uncertainties around forecasting the neutral rate, and as such, have suggested that the Fed will be data-dependent  in their policy approach.

"It should be noted that the Fed has consistently characterized the current tightening plan (the dots rising to around 3.5% by 2020) as gradual," UBS says, and notes that current market pricing is well below the Fed's projections: "the implied funds rate peaks ~2.7% in 2019, and declines to 2.5% in 2020," UBS says, "Clarida is one of those dots, so his view in September was much more hawkish than current market pricing."

The bank also notes that the Atlanta Fed's GDPnow model for Q4 GDP is tracking growth around 2.5%, which is above the potential growth rate, and in line with the Fed's 2018 growth forecast, "so there's no current reason to revise. Clarida is endorsing the Fed's plan, with the caveat that the plan may change if the data does."

Speaking at the Economic Club of New York on Wednesday, Fed chair Powell said interest rates are "just below" the estimate of the neutral rate (which is seen somewhere between 2.5 to 3.5%, meaning there is still scope for three hikes to reach the mid-point of the neutral estimate), echoing comments from the Fed's VC Clarida on Monday, and continuing the run of dovish Fedspeak from key officials.

Powell reiterated the Fed's data dependent policy stance and that there was no pre-set policy path; however, he talked-up the US economy once again, saying that he expects US growth, low unemployment and close-to-target inflation, and did not see any
excesses in the stock markets.

The release of his comments saw a dovish reaction in markets, with the USD plunging, stocks bouncing, while the Treasury complex also caught a bid. In the Q&A, Powell reiterated views he made in October that the R-star rate was uncertain, adding that it was too soon to say that the recent financial market volatility changes his estimate of neutral policy or maximum employment.