The United States Federal Reserve published the minutes of January’s interest rate decision.
It was expected that the FOMC would take into account the events since the December interest rate rise and this was the message the markets received.
The FOMC minutes, on the whole, gave us no surprises with the transcripts being more or less in line with last week’s testimony by the Fed chairwoman Janet Yellen to the House Financial Services Committee.
Fed Officials saw the events since December have increased the downside risk. The inflation outlook remained uncertain and external factors are a continued source of concern with the confusing situation in China hindering the FOMC’s policy decision making.
Furthermore, the FOMC expect inflation to be lower for a long time due to the depressed price of crude oil. The FOMC was of the opinion that oil and an improvement in the US economy could help bring inflation back to target but was not sure how long the downside risks will last for.
The strength of the US dollar was discussed and according to the minutes with concerns that the Greenback's inflated value would hinder a recovery in the manufacturing sector.
Of all the concerns the FOMC highlighted the high volatility in the financial markets as the biggest issue and could lead to an amplification of the downside risks.
The Federal Reserved based the December increase on data that indicated that the job market is strong and that the expectation that inflation will increase.
The landscape since the December rate hike has changed dramatically. What is certain is that the FOMC would not have moved to increase interest rates in December if these events had happened in November.
The minutes portrayed an FOMC that is not only data dependent but also unsure of the trend of the data.
This leads us nicely to the forecasts made by the Federal Reserve which according to their now discredited dot plot predicted that there will be four interest rate increases in 2016. Although the FOMC have not admitted defeat, the dot plot is no longer being mentioned and the idea that the FOMC will abide by their prediction has been priced out by the market.
As if history is about to repeat itself and very much like the back end of 2015, the market has increased the odd of a December increase.
Such a move will only happen if the data fits.