Confirming what we said earlier, in its post-mortem, Goldman's chief economist Jan Hatzius notes that the minutes of the January FOMC meeting "continued to emphasize patience in the policy outlook due to uncertainty around financial conditions, slower foreign growth, and softer inflation."
While the bulk of the minutes was trivial, as participants maintained a relatively steady view of the growth outlook, noted that inflation “remained near 2 percent” even as inflation pressures appear “muted,” and continued to note rising downside risks, the one surprise was that almost all participants thought that it would be desirable to announce soon a plan to stop reducing the Fed’s asset holdings later this year.
But before we get into the weeds on Goldman's take what the Minutes meant for the future of QT, here is a quick recap of the bigger picture:
Participants noted that both core and overall inflation “remained near 2 percent” but discussed whether recent “softness” in inflation would persist, as upward inflation pressures appear “more muted.” Some participants pointed to increasing wage growth in their districts due to "tightening labor market conditions” or “gains in the rate of productivity growth.” Participants noted that market-based measures of inflation expectations were lower in recent months, but also noted that survey-based measures of inflation expectations were “little changed.”
Participants supported the removal of the hiking bias and its replacement with a sentence emphasizing a “patient and flexible approach.” Participants pointed to tighter financial conditions, softer inflation, slower foreign growth, and trade policy uncertainty as justifying a patient approach to policy. However, a range of views were expressed on what adjustments to the funds rate may be appropriate later this year. “Several” participants argued rates increases were necessary “only if” inflation was higher than in their baseline, but “several” other participants indicated that hikes would be appropriate if the economy evolved as they expected. In addition, “many” participants noted that if “uncertainty abated,” the FOMC could alter the “patient” statement language.
Finally the punchline: according to Goldman, the Fed will end its balance sheet unwind before the end of the year, long before primary dealers and the buyside had expected (which according to the majority, was some time in 2020).
Discussing the Fed's balance sheet comments, the bank notes that "almost all participants thought it would be desirable to announce soon a plan to stop reducing the Fed’s asset holdings later this year. The staff also presented options to slow the pace of bank reserves shrinkage through the growth of nonreserve liabilities while keeping the total size of the balance sheet flat. Many participants suggested that such a one-sided squeeze of reserves could be appropriate." And, as Powell had previously hinted, following a discussion of market commentary that QT might be influencing financial markets, "participants agreed that it was important for balance sheet policy to be flexible in principle."
As a result, following the minutes Goldman now expects an announcement at the March meeting that runoff will stop at the end of Q3 and that reserves will be gradually reduced somewhat longer via the growth of nonreserve liabilities.
Finally, the bank left its Fed call probabilities unchanged, still expecting one hike in 2019, and "an additional 0.6" net hikes - a number which merely reflects odds rather than reality as the Fed can't half-hike - in 2019.