What To Expect From FOMC Minutes? – Views From 10 Major Banks

The following are the expectations for today’s FOMC minutes from the December meeting as provided by the economists at Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and other major banks.

Goldman Sachs: Taken together, the December FOMC statement, Summary of Economic Projections (SEP), and Chair’s press conference were fairly close to expectations. We saw the statement and SEP as leaning a bit on the dovish side, and the press conference as leaning a bit on the hawkish side. For the minutes, we think the key questions are: (1) do participants acknowledge that the word “patience” (included in the new forward guidance) draws a parallel with the timeline for the 2004 hiking cycle? (2) How prominently did oil market developments figure into discussion of the outlook for growth and inflation? (3) Was there any concern expressed about mixed signals on long-term inflation expectations? (4) Do the minutes echo Chair Yellen’s remark that the path of rate hikes, once begun, may not be smooth?, and (5) Is there any further discussion of exit strategy tools, such as segregated cash accounts?

Morgan Stanley: Our US economist’s call for the Fed hiking interest rates in 1Q16 and not in mid-2015 as projected by the rest of the forecast community seems to be well on track and should receive another credibility boost by the release of the Fed minutes today. Yes, the December 17 Fed statement was hawkish, reflecting better US growth data, but since December commodity prices have declined markedly with oil breaking below the bear case projection of our oil analysts, suggesting US and global inflation rates could fall. Given current pricing of oil and gas, our economists expect US headline inflation to drop into negative territory in January. There is an increasing risk that headline US inflation in most of 2015 could stay negative and temporary downward pressure for core inflation too.

BofA Merrill: The December FOMC statement revealed a lack of agreement among Fed officials over communication, as evidenced by the complicated extension of the forward guidance language and the dissents from both sides of the hawk-dove spectrum. The minutes may give some insight into how extensive these disagreements are, particularly over the conditions that would allow for liftoff sometime in 2015. As the statement skewed slightly more dovish than expected in December, we expect the minutes to follow. The risk is that they are more reminiscent of the tone of Fed Chair Janet Yellen’s press conference remarks, and thus would be seen as somewhat hawkish…Given the volatility heading into the December meeting, we do expect more discussion of global economic, geopolitical and financial market risks than in the statement. If these risks are downplayed as in the October minutes, that would be mildly hawkish. The retention of the “considerable time” phrase even as a “patient” approach to policy was added suggests the Committee could not agree on changes to the guidance language. Explicitly noting the equivalence of the two suggests significant concern of an undesirable market selloff. We expect an active debate over communication in the minutes, which may give some indication of how the Committee will modify the guidance going forward. Discussion over the conditions that would warrant rate hikes will be notable as well. The 2015 voters also lean more dovish, suggesting more caution than usual when interpreting hawkish remarks in the minutes.

Credit Agricole: In the December FOMC meeting minutes, the discussion behind the forward guidance changes will provide a better gauge of the balance of views on the dove-hawk scale with regard to economic conditions and the rate lift-off. We will look for additional clues on the dove-hawk balance in the December FOMC minutes. While the December FOMC statement offered a hawkish tone in introducing “patience” in policy normalisation, the Fed dampened such sentiment by stressing that its guidance remains consistent with the previous statements’ “considerable time” characterisation. We find that the altered guidance does not signal a change in the policy outlook, which remains dependent on the data. Yet, somewhat unsurprisingly, it prompted two hawks to dissent. Further insight on the Fed’s views on the labour market improvement and disinflationary pressures will be useful in understanding the introduction of “patience”. Downward movement in the median fed funds rate projections added a dovish angle and implies a slower pace in rate hikes, so any more information on postlift-off normalisation will be helpful as well. Discussion about the impact of declining energy prices on domestic inflation and financial stability will be of particular interest, given recent oil price movements and financial market volatility. As Chair Yellen noted in her press conference that the normalisation process is unlikely to begin for “at least the next couple of meetings,” any additional comments on the timing may be offered in the minutes. Finally, the minutes likely offered more discussion on segregated accounts, other interest rate tools and the Fed’s balance sheet normalisation process.

RBS: We are likely to come off with the same broad guideline of mid‐2015. Fed Funds futures have the first hike priced out of Sep‐15. We already know that the Fed is looking through temporary supply side shocks to inflation; much like they didn’t respond to the CPI spike in 2011. At the Dec press conference, Ms Yellen said the FOMC does not need inflation rates to rise before hiking the Fed Funds rate, but instead needs “a feeling of reasonable confidence that when we start the process of normalizing policy, that it will be moving up over time.” That is hawkish and suggests that the first hike could come even with core PCE at ~1.5%. All this makes the discussion around inflation expectations even more interesting. Here I believe we will also come away with ‘survey‐based measures are still well‐ anchored while market‐based measures have declined (in line with oil prices)’. Nothing too conclusive. Overall, given that we had a comprehensive press conference, there may not be much to expect.

BTMU: Key for the US dollar this year will be how jobs growth shapes earnings growth. We expect a notable pick up in earnings growth this year and we’d expect the FOMC minutes this evening to mention earnings as a key element of what will shape the monetary policy outlook. Given that Chair Yellen held a press conference after the December meeting, the minutes today might not be that revealing. Still, what will be revealing is how intensive the debate was on changing the communication in regard to the timing of the first rate increase. We suspect that both the ADP employment report and the FOMC minutes will be dollar supportive today. Dollar buying momentum remains strong and that’s unlikely to change until we get by the ECB monetary policy decision. With the market currently only priced at about a 30% probability for a June rate increase in the US, the dollar is deriving support from external factors as much as internal factors.

BNPP: It is questionable whether today’s release of the minutes for the December FOMC meeting will provide a strong signal for markets. With most FOMC members likely unsure themselves on the likely timing and pace of Fed policy tightening, the minutes are likely to stress data dependence over the months ahead. Moreover, the nature of the minutes has often tended to confuse rather than clarify the Fed outlook over the past two years, as markets struggle to weigh the importance of various opinions voiced by different unidentified participants. With long USD a high consensus and heavily positioned view coming into the New Year and with market participants seemingly inclined to pare back exposures this week, risks for the USD are probably skewed to the downside heading into the release. Moreover, as the chart below shows, the USD has often reversed its immediate post-meeting reaction on the release of the minutes, especially following big post FOMC moves and the USD gained sharply in the aftermath of the December meeting. However, whatever the immediate reaction is, we think attention will quickly turn to back to the data as this will ultimately determine the Fed’s course of action.

Credit Suisse: The debate surrounding the forward guidance in the December 17 FOMC statement will be in focus in this week’s release of the minutes. We expect the FOMC minutes will support our view that the Fed will begin hiking its fed funds rate target in 2015, probably at its June meeting.

Danske: The latest Fed minutes are published tonight. It will be interesting given the removal of ‘considerable time’. For now, though, consensus of a June hike seems to be building, which should also be reflected in the minutes.

SEB: Forward guidance was modified at the December meeting since recent global events notwithstanding the US economy is firing on all cylinders. “Considerable time’ was swapped for ‘patient’…As such, the likelihood of the first hike in June or earlier has increased. We keep our September 2015 liftoff forecasts for now, however. The turmoil in global markets and Russia’s financial crisis was all over the news in the days ahead of the December meeting. While the FOMC refrained from acknowledging these events in the statement it will be interesting to see if the turmoil has changed the Committee’s thinking on global risks.

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