No Signals of Removing "Patient" Key takeaways from the January 28th FOMC meeting minutes 1 :

Transcription

1 Surprisingly Dvish Minutes The January 28 th FOMC meeting minutes revealed a decisively mre Dvish sunding FOMC than many market participants had expected. Giving n signal the Cmmittee is ready t back away frm their patient language, plicymakers instead reaffirmed their willingness t keep interest rates near zer fr lnger. Surprising investrs, the Fed s reiterated cmmitment t accmmdatin pushed market expectatins fr liftff ut 1-2 meetings, althugh the median cnsensus remains firmly mid-year. Amng the barriers t rate increases, the Fed nted a plethra f internatinal develpments ranging frm a rising USD t turmil in Greece. Furthermre, Cmmittee members appeared increasingly cncerned regarding inflatin reaching the Fed s lnger-term gal, as well as underlying strength in the labr market. Frm here, attentin nw turns t Chair Yellen s testimny next week. Investrs will be lking fr clarificatin in the plicy testimny in terms f the timing f the first rate increase. Hwever, Yellen s testimny is likely t be far less revealing. Instead, we expect the Chairman t reiterate the Fed s relatively balanced view n the ecnmy, their data-dependent stance, and the Cmmittee s rising cncerns arund the glbe frm declining il prices t geplitical unrest. Cmmittee members did discuss hw best t cmmunicate rate hikes t the market when the time cmes, but fr nw, members agreed that the Cmmittee can be patient in beginning t nrmalize the stance f mnetary plicy. In fact, Cmmittee members wrried an early start t plicy nrmalizatin wuld undermine prgress twards the Cmmittee's lnger term bjectives and increase the likelihd that the Cmmittee might be frced by adverse ecnmic utcmes, t return the federal funds rate t zer. In ther wrds, Cmmittee members viced cncern that raising rates t sn wuld ultimately frce the Fed t draw rates back dwn t zer if the ecnmy was t fragile t withstand rising rates. N Signals f Remving "Patient" Key takeaways frm the January 28th FOMC meeting minutes 1 : N signals fr remval f patient. Many participants regarded drpping the "patient" language in the statement, whenever that might ccur, as risky, ptentially crralling market expectatins fr the beginning f plicy firming tward an unduly narrw range f dates. In ther wrds, while investrs are betting n an increase as early as June, the Fed is keeping a much wider timeframe pen fr the first rate increase. Many members assessed the balance f risks ranging frm a rapidly rising US dllar t turmil in Greece had inclined them tward keeping the federal funds rate at its effective lwer bund fr a lnger time. This statement essentially signals a willingness t keep interest rates lwer, lnger, and ptentially delays the first rate increase until next year. 1 Link t the FOMC Minutes

2 Further clarificatin n internatinal develpments. In January, the Fed added internatinal develpments t the list f cnsideratins in determining the apprpriate timeline fr plicy firming. The FOMC statement, hwever, did nt specify what specific develpments it was referencing. This week, the January FOMC meeting minutes clarified that the Cmmittee is in fact cnsidering a plethra f factrs under the umbrella f internatinal develpments including the strength f the USD, geplitical risks, and internatinal central bank plicy mves. Cmmittee members expressed increasing cncerns ver glbal events and agreed the FOMC statement shuld explicitly acknwledge the rle f internatinal develpments as ne f the factrs influencing the Cmmittee's assessment f prgress, twards maximum emplyment and 2% inflatin. Sme Cmmittee members were encuraged by the recent actin taken by central banks arund the wrld cutting rates and prviding stimulus, which strengthened the utlk abrad. Still, ther members were mre cautius in their assessment f internatinal events, specifically nting the recent increase in the value f the dllar which was expected t be a persistent surce f restraint n U.S. net exprts, with a few participants cncerned the dllar culd appreciate further. On net, the Cmmittee agreed that the US dllar has strengthened appreciably against the currencies f mst ther advanced ecnmies amid investr cncerns abut grwth in thse ecnmies as well as increased mnetary accmmdatin in sme f them. In additin, Cmmittee members nted the slwdwn f grwth in China, as a factr restraining ecnmic expansin in a number f cuntries, and several ther internatinal risks, including glbal disinflatinary pressure, tensins in the Middle East and Ukraine, and financial uncertainty in Greece. Prir t the January statement, the Fed had reluctantly acknwledged risks t the US ecnmy resulting frm sluggish grwth verseas. In a rare mve, the FOMC added a specific reference t internatinal develpments, suggesting the status f internatinal risks has been upgraded frm the periphery t frnt and center. The laundry list f internatinal risks frm Greece t Ukraine creates that many additinal barriers t rate increases, further suggesting an extended timeline fr liftff. United States Eurpean Central Bank Bank f Japan Swiss Natinal Bank 2015 Central Bank Plicy Mves* QE3 cncluded in Octber 2014 Federal funds target rate unchanged at 0.25% QE annunced, 60B/mnth until September 2016 Rates at recrd lw f 0.05% Emergency liquidity assistance cap frm 3.3B t 68.3B t supprt Greece thrugh February Reiterated pledge t increase mnetary base at annual pace f 80Tr Remved lngstanding cap n Swiss Franc Interest rates lwered frm -0.25% t -0.75% Bank f Canada Lending rate lwered frm 1% t 0.75% Denmark Natinalbank Depsit rate lwered frm -0.05% t -0.2% Lwered lending rate frm 0.2% t 0.05% Bank f Russia Main interest rate lwered frm 17% t 15% Peple s Bank f China Lwered interest rates frm 6.0% t 5.6% Central Bank f Brazil Increased benchmark interest rate t 12.25% Riksbank (Sweden) Lwered interest rates 0.0% t -0.1% Annunced a bnd-buying prgram ttaling 10B krnr Reserve Bank f Australia Lwered cash rate frm 2.50% t 2.25% *Other central banks including Turkey, Urkraine, and Rmania have taken small plicy steps Inflatin cncerns utside f energy. In the January FOMC statement, the Fed nted that inflatin pressures had declined further belw the Fed s lng-term target, largely reflecting falling energy prices. Hwever, the minutes reveal a grwing cncern regarding sluggish inflatin utside f the energy sectr. Participants acknwledged inflatin measures excluding energy had als mved dwn in recent mnths, including, dwnward pressure n imprt prices. Excluding fd and energy csts, mst participants saw the cntinuing weakness f cre inflatin measures as a cncern. Declining energy prices are a recent phenmenn; hwever, the PCE has been tracking n a disinflatinary trend since late 2011 with bth the headline and cre inflatin measures well belw the Fed s 2% target level. The PCE remains sluggishly lw, up just 0.7% year-ver-year, the lwest annual increase since Similarly, the cre PCE which excludes fd and energy csts was unchanged in January and up 1.3% year-ver-year.

3 Wage grwth has remained stagnant at a near 2% annual pace since the end f the recessin, and furthermre imprt prices have fallen rapidly, dwn 8% ver the past 12 mnths. While few participants discussed the pssibility f rapidly rising wage grwth, several Cmmittee members viced cncerns that the weakness f nminal wage grwth indicated that cre and headline inflatin culd take lnger t return t 2 percent than the Cmmittee anticipated. Balanced assessment f the ecnmy. The Fed cntinues t see the risks t the ecnmy as rughly balanced, althugh the dwnside risks t the frecast fr inflatin were seen as having increased smewhat, partly reflecting the recent sft mnthly readings n cre inflatin. Befre beginning n a path twards plicy nrmalizatin, a number f participants suggested they needed t see further imprvement in the labr market and data pinting t cntinued grwth in real activity at a pace sufficient t supprt additinal labr market gains. Sme participants suggested that cnsiderable labr market slack remains, especially when indicatrs ther than the unemplyment rate were taken int accunt, including the unusually large fractin f the labr frce wrking part time fr ecnmic reasns. Recent headline jb creatin has averaged 279k a mnth since June 2014; hwever, the quality f hires remains lackluster with businesses still heavily reliant n lw-cst, flexible labr. The majrity f jb creatin remains dminated by part-time, lw-wage, and temprary hiring. Furthermre, the underemplyment rate, which includes marginally attached wrkers and part-time wrkers that wuld prefer full-time wrk remains elevated at 11.3%, almst duble the civilian unemplyment rate f 5.7%. Other participants nted a need fr increased cnfidence in inflatin returning t 2% befre beginning rate increases. A number f participants emphasized that they wuld need t see either stable r rising levels f cre PCE inflatin r evidence that cntinued lw readings n these measures did nt cnstitute grunds fr cncern. The Fed has cntinued t miss their lng-run inflatin target fr mre than tw and a half years. Despite mre than five years f extrardinary accmmdatin, wage grwth remains sluggish with heightened levels f slack remaining in the labr market. The threshld fr liftff is clear and cncise evidence the ecnmy is strng enugh t tlerate rising rates. Hwever, with back-tback mnths f negative retail sales, a decline in the ISM t a ne-year lw, tw large cnsecutive mnthly declines in durables rders, and a slwer-than-expected Q4 GDP reprt, there is ample reasn fr Cmmittee members t questin the ecnmy s ability t withstand a higher rate envirnment.

4 Cnclusin The January FOMC meeting minutes revealed a much mre Dvish tne than expected frm plicy makers, a trend the market may have t get used t given the decisively Dvish prfile f this year s vting members (see the FOMC table n page 6). Nting rising cncerns f undermining grwth shuld liftff ccur t sn, as well as lingering slack in the labr market and declining price pressures, the Fed als added a plethra f internatinal risks as ptential barriers t rake hikes. Market participants cntinue t frecast a mid-year rate increase; hwever, the Fed shwed n signs f backing away frm the patient language, suggesting plicy fficials are cnsidering a substantially lnger timeframe fr liftff than investrs. While participants nted the relative imprvement in the ecnmy, members warned f the dwnside risk t inflatin in particular and reaffirmed their willingness t keep interest rates near zer fr lnger. In ther wrds, the Fed will expectantly maintain their patient apprach t plicy, likely extending the timeline fr rate hikes beynd Lindsey Piegza, Chief Ecnmist

5 Glssary FOMC Federal Open Market Cmmittee GDP Grss Dmestic Prduct ISM Institute fr Supply Management PCE Persnal Cnsumptin Expenditures USD US Dllar