Soft minutes support uncertain Fed on hold

•    While it was unclear exactly how to interpret the statement as per usual, the minutes were definitely to the dovish side and based on the minutes it is hard to see another hike at least until June.
•    In general, the Fed was not sure how to interpret the developments in the economy and in the financial markets since the initial lift-off in December. We continue to believe that the Fed will stay on hold until September due to continued stress in financial markets short-term and rising risk of a systemic crisis. The Fed will not risk tightening too much, too quickly, see also Research US: Fed on hold – uncertainty set to keep Fed sidelined, 12 February.
•    With respect to the financial turmoil, ‘most’ policymakers judged ‘it was premature to alter’ their economic outlook. It was noted that the effects of the falling stock markets, wider credit spreads and an appreciation of the USD ‘may be roughly equivalent to those from further firming in monetary policy’. As we already mentioned before the initial lift-off in December, if financial conditions tighten, the Fed can hike more gradually.
•    With respect to the inflation outlook, there were a range of views which explains why the FOMC removed that it was ‘reasonably confident’ inflation will reach 2% in the statement. ‘Most’ FOMC members continue to expect inflation will move towards 2% when the oil price and the dollar stabilise. ‘Several’ saw this depending on further tightening in the labour market. ‘A number of participants’ indicated that the recent development implied that the inflation outlook was ‘somewhat more uncertain’ and risks as ‘being to the downside’. The most dovish FOMC members (‘a couple’) want ‘direct evidence’ that inflation is moving towards the 2% target.
•    FOMC members disagreed on how to interpret the fall in market inflation expectations. ‘Some’ were concerned while ‘some’ noted the ‘difficulty of distinguishing declines in expected inflation […] from changes in risk and liquidity premiums’. Since the meeting, long-term inflation expectations in consumer surveys have fallen, which likely have made more FOMC members more worried.
•    The minutes reveal that the labour market continues to be one of the few bright spots left in the Fed’s chart book.
•    Overall, the Fed was dovish as it was not confident how to interpret the recent financial turmoil, the weaker-than-expected data and falling inflation expectations. The Fed recognises it needs more data before making a more thorough analysis in connection with the March meeting and the updated projections. ‘Members generally agreed that the implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook’.

Mikael Olai Milhøj
Danske Bank