Five Minute Preview: FOMC Minutes – October Meeting In less than 2 hours the Federal Reserve will release the minutes of its last meeting from 28/29th October. While all Fed communication is worth watching out for, these minutes are imbued with extra significance, as the Fed ended its QE programme last month. The statement released with the conclusion of the Fed meeting on 29th October was upbeat about the outlook for the labour MARKET, and it did not include too many concerns about the recent decline in CPI. However, the Fed also pledged to keep rates low for a considerable time, and even with the recent improvements in the economic outlook they do not appear to be in a hurry to hike INTEREST RATES. The minutes give us a more detailed account of the discussion at the last FOMC meeting compared to the statement, and the MARKET will be looking to pounce on any hint of dissent on the Committee. Due to this, we will be looking for three things when we scrutinise the minutes: 1, Growth The US economy is creating jobs at a healthy clip, and the unemployment rate has fallen to 5.8%, the lowest level since 2008. Can the Fed do anything else to help the labour market at this stage? We expect the bank to suggest that domestic fundamentals are fine and dandy; it’s the external environment that is causing the issues. China and the Eurozone, in particular, are slowing down; the Eurozone is virtually stagnating, which could keep the Fed cautious on the future outlook for the US economy. If the Fed does sound concerned about the foreign headwinds that may threaten the US economic recovery then we may see a softening in the dollar. 2, Inflation: Towards the end of Q3 we noticed a subtle shift in rhetoric from some of the more dovish members of the Federal Reserve away from employment and towards weak inflation pressures. The inflation rate in the US is 1.7%, below the Fed’s 2% target rate. So far the Fed has shrugged off weak inflation blaming it on transitory factors like food and ENERGY PRICES. However, since food and energy prices continue to fall then some members may start to worry about the possibility of a prolonged period of disinflation. The powerful head of the New York Fed, Bob Dudley, along with Kocherlakota have mentioned weak inflation in recent speeches. If the minutes suggest that the focus is shifting towards weak price pressures then we think the dollar could take a hammering, along with US Treasury yields. 3,The timing of a rate rise In the October statement the Fed pledged to keep rates low for a considerable time. However, the minutes could suggest a more nuanced conversation took place, and some members may want to get rid of this phrase in time for the December statement. This would be the most hawkish outcome from these minutes, in our view, and could send the DOLLAR soaring, as the FX MARKET rushes to price in a shift in policy at next month’s meeting. If the FOMC seems fairly happy with considerable time being used in the statement then we could see a softening in the dollar. Conclusion: Overall, these minutes are more significant than usual due to the ending of QE at the October meeting. We could see a softer dollar if the Fed sounds concerned about external growth threats like a weakening Eurozone economy, or if some members sound so concerned about weak price pressures that they consider pushing back their expectations for the first FOMC rate hike to late 2015. If the minutes suggest that the FOMC is sanguine on the inflation outlook, and if it suggests that the Fed may drop the phrase considerable time from the December statement in relation to the timing of the first rate hike, then we could see the dollar surge higher. As always, when it comes to potential changes in Fed policy, watch USDJPY. This pair has advanced some 10% since the October meeting, largely on the back of the extension to the BOJ’s QE programme. Thus, it is vulnerable to a pullback on the back of a dovish tone to tonight’s minutes. If the minutes have a hawkish slant, then USDJPY could rise to 120.00.
Posted on: Thu, 20 Nov 2014 07:15:08 +0000
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