As my colleague Kathleen Brooks highlighted earlier today (see “Five Minute Preview: FOMC Minutes, October Meeting” for more), there were three primary topics to monitor: Growth, inflation, and the timing of the first interest rate hike.
As anticipated, the central bank was generally satisfied with domestic economic growth, but expressed concerns about the global economy:
“In discussing economic developments abroad, participants pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period. It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected. However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited.”
In addition, the minutes noted continued improvement in the unemployment rate, though opinions on the amount of “slack” in the labor market.
Far more improtant to traders is the Federal Reserve’s outlook for inflation. Most FOMC participants anticipated that inflation was likely to edge lower in the near term on the back of falling commodity prices and the strong dollar. Concerningly for dollar bulls, “a few” Fed members thought the return to 2% inflation would be “quite gradual,” suggesting little pressure to tighten monetary policy any time soon.
Seemingly the most hotly-debated topic was the now infamous “considerable time” (before raising interest rates) pledge. Not surprisingly, some of the hawks on the FOMC preferred to remove the phrase, while doves thought the pledge was still effacious. Most surprisingly, the minutes noted that (emphasis mine),“Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels.”
This was perhaps the most significant line in the entire 8,000+ word document, as it suggested that regardless of when the Fed initially decides to raise interest rates, subsequent rate hikes may be more gradual than many traders had been expecting. Of course, the Fed’s outlook is always data-dependent and subject to change, so traders shouldn’t read too much into this one comment from one month’s minutes, but it is a good reminder that the markets are also focused on the Fed’s full normalization process, not just the initial rate hike.
Market Reaction: Muted
Markets were very choppy in the wake of the release, with the dollar initially falling (driving EUR/USD up to 1.2600 and USD/JPY down to 117.50) before extending its uptrend as we go to press. Other markets were similarly volatile; the Dow Jones Industrial Average briefly peeked into positive territory before dropping back to below its pre-minutes price, while the benchmark 10-year bond yield shed 3bps down to 2.32% before recovering back to 2.34%. At the end of the day, today’s balanced Fed minutes disappointed the most ardent of dollar bulls, but they still suggest that the US economy is extending its gradual recovery and the Fed remains intent on normalizing policy, eventually.