What To Look For In Today's "Potentially Relevant" FOMC Minutes

The FOMC’s April/May meeting saw the Fed firmly in neutral with recent Fedspeak suggesting that the Fed remains in "patient, or "wait and see mode," assessing how trade wars will impact growth and inflation. Traders will be particularly attentive to any guidance on the ‘transitory’ nature of inflation, uncertainties around trade, and ‘insurance’ rate cuts.

Courtesy of RanSquawk, here is a recap of what happened during the last FOMC meeting, and what to expect today:

Meeting Recap

At its April/May meeting, the FOMC unanimously decided to hold the FFR target between 2.25-2.50%, as expected, though cut the IOER by 5bps to 2.35%. The statement saw the Fed acknowledge a "solid" rate of growth (upgrading its view), while pointing out that both overall and core inflation has eased (downgrading its view to 'below 2%', while also dropping its reference to low rates being a function of low energy prices). The Fed noted that job gains have been solid, though growth of household spending and business fixed investment has slowed. Fed Chair Powell attempted to navigate a neutral line in his press conference, reiterating the messages of the statement, while emphasising the appropriateness of the Fed's policy stance, and the familiar message of neutral, seasoned with patience. The chair added that while business fixed investment and household spending had slowed, he sees it rebounding. Risks have moderated since the beginning of Q1, (data from China and Europe, disorderly Brexit pushed back, progress on trade talks with China, where the gains would be seen over time). Powell said the Fed was strongly committed to a symmetric inflation target; core inflation fall was unexpected, but likely transitory (this affirmation would prove to be the turning point during the presser, from a markets perspective). Powell said the policy stance is currently appropriate and does not see the case to shift rates in either direction (on a few occasions reiterating that the current policy stance was appropriate); he said the IOER was a technical adjustment that does not represent any shift in the Fed's policy stance; the FFR remains the central bank's primary policy tool; he also said that the Fed could look at the possibility of a repo facility at upcoming meetings. Fed Chair Powell was pressed on conditions that the Fed would need to see before considering cutting rates, though he seemed reticent to be drawn in, instead reiterating the Fed's policy targets. Asset prices were elevated, but not extremely so, though has some concern about corporate leverage; overall though, he does not see evidence of overheating. The FOMC had a discussion on the composition of the balance sheet; a decision will need to be taken at future meetings, and any changes will be telegraphed well in advance, Powell said.

Watch For: Trade Uncertainty

  • Fed Chair Powell, Fed Vice Chair Clarida and FOMC Vice Chair Williams all gave remarks this week ahead of the FOMC minutes release, but there was very little to take away, and the Trinity focusing more on the fundamentals of monetary policy itself, avoiding any detail on US trade policy. Analysts note that without the details of Chinese countermeasures, and details of any exemptions, it is difficult to outline exact economic implications. Until then, uncertainties are likely to persist through to the G20 meeting in June, and the Fed may choose to refrain from committing in either direction until the uncertainty has lifted, delivering upbeat remarks on the progress of the US economy instead.

Watch For: Insurance Rate Cuts

  • When journalists were attempting to cajole Powell into an answer on rate cuts, the Fed chair strongly emphasized the Fed's neutral position, arguing that he did not see the case to move rates either way. Analysts expect, therefore, that the minutes will show a broad consensus for that neutral stance and a high threshold for possible insurance rate cuts. Indeed, the Fedspeak in the run-up to the release of the minutes has tended to be neutral, signalling that there is support for this view. CS thinks a significant downgrade of the economic data would likely be needed in conjunction with rising financial stress before the Fed entertained lower rates. On the IOER, the minutes will likely reiterate that the move was technical in nature.

Watch Fore: Transitory Inflation

  • Powell downplayed the significance of cooling inflation, suggesting that it was a result of transitory factors, and the minutes will provide insight on how confident the FOMC is in this view. Credit Suisse has argued that Powell's categorisation of inflation as transitory might be an effort by policymakers to push back against speculation of an insurance rate cut. The 'transitory' argument has been pushed forward in remarks by other Fed policymakers since the May meeting too, again signalling that the majority of officials on the Committee tend to agree with Powell. Naturally, there are elements that do not agree - the Fed' Bullard (voter) recently made the case that if inflation remains at 1.6% he would be more aggressively in favor for lowering rates, signalling that there may be more voices calling for lower rates than higher.

Additionally, here is the take from Nomura's Charlie McElligott who warns that today's Minutes have "potential for actual relevance" for the following reasons:

  • Potential for further clarity on Powell’s recent characterization of inflation weakness as “transitory”
  • There too is potential for an update on Fed balance-sheet normalization—recall, QT is “still a thing” currently (keeping USD “bid” with b/s runoff, policy rates at 11y highs and increased Treasury issuance acting to restrict USD liquidity), but shifts to QE-Lite in Oct; thus we could hear more about the Fed’s vision for the composition of the balance-sheet and the concept of something where purchases look “reverse operation twist”-like by being concentrated into T-Bills in order to shorten WAM and steepen curve
  • Finally, we should be on the lookout for any further developments on a standing repo facility as a long-term solution to ease the current / recurring funding squeeze dynamic—as this mechanism would allow for USTs to be “fungible” into Reserves if required “on demand,” helping in periods of “tighter” funding rates