This week’s marquee data release has just dropped and it’s left traders more confused than ever about the performance of the US economy and the direction of monetary policy. The minutes from the Fed’s mid-March meeting showed a sharp division between Fed policymakers; to wit, here are some the major headlines from the release:
- Several Participants At Fed Meeting Judged That Economic Data Likely To Warrant June Rate Hike
- Other Participants Anticipate Initial Rate Hike More Likely Later In 2015 Due To Impact Of US dollar And oil Prices
- Minutes Say A Couple Of Participants Suggested Holding Off Raising Rates Until 2016
In other words, there’s something in the report for everyone. Just like in the children’s story “The Three Bears,” each Fed official has his or her own preference as to IF the economy is “too hot” or “too cold.” And it’s up to Goldilocks -- the individual trader/analyst -- to determine which view will turn out to be “just right.”
Beyond the stark divergence in perspectives on the first rate hike, FOMC participants agreed that the pace of interest-rate hikes will be “gradual,” citing the “balanced” risks to the economic outlook and job market. One new tidbit was an increase in the rhetoric surrounding overseas developments and the recent strength in the dollar:
- A Few Fed Officials Said USD May Rise More On Policies Overseas
- Fed Officials Repeated That China, Greece Were Potential Risks
- A Few Fed Officials Said USD May Rise More On Policies Overseas
In some ways, the recent strength in the dollar has done some of the Fed’s heavy lifting for it. Thus, by decreasing the price of US imports and making US exports less attractive, the dollar’s rise is already tapping the brakes on the US economy, decreasing the need for an immediate interest-rate hike.
Market Reaction
The initial market reaction was toward dollar strength, as the minutes did not explicitly rule out the potential for a June rate increase. As we go to press, though, the dollar's strength was fading as traders realize that this month’s disappointing NFP report has drastically decreased the likelihood of a hike this quarter. US yields followed a similar tact, with the 10-Year yield ticking up 2bps before returning to pre-minutes levels at 1.90%. Finally, US equities traded a smidge higher after initially dipping.
As it stands, though, the Fed remains as data-dependent as ever and the recent disappointments in US economic data mean the odds of a June rate hike are fading rapidly.
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