In its December meeting, the FED not only raised rates, but also took a hawkish stance, upgrading the dot-plot for 2017, this year. We will now get the meeting minutes for this event. What can we expect? Here are views from Bank of America, Goldman Sachs,
Here is their view, courtesy of eFXnews:
Preview: 3 Things To Look For At December FOMC Minutes – BofA Merrill
1- The minutes from the December 14th FOMC meeting are likely to reveal modest optimism about the improvement in the recent data but a “cloud of uncertainty” about how fiscal policy could change the trajectory. While it seems likely that there will be some form of fiscal stimulus, the details are not yet apparent which makes it difficult to gauge the risks to the forecast. We therefore think the minutes will show that there was a conversation about the possible scenarios without committing to the outcome. We also think that Fed officials likely discussed the health of the labor market with a particular emphasis on measuring slack in the labor market given the drop in the unemployment rate to 4.6%. The labor force participation rate has edged higher this year, but in a very choppy fashion making it hard to decipher the trend. Moreover, the improvement in wages has been uneven, further complicating whether we have returned to full employment.
2- Inflation will also be in focus. The statement noted that although market measures of inflation compensation have moved up considerably, they remain low. And meanwhile survey-based measures remained little changed. Seemingly the Fed is not concerned about a rise in inflation expectations that could bias inflation higher. We think there will likely be a bit of a debate over the risks to inflation.
3- We will also look out for any conversation about risk management. Interestingly, Fed Chair Yellen did not talk about the asymmetry when policy is close to the effective lower bound. When asked about allowing the “economy to run hot” she said that it was not the Fed’s intention to be behind the curve with policy. This was perceived to be a hawkish signal by the markets. It will be interesting to see the discussion among Fed officials about the risks.
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Opinions for Goldman Sachs, UBS and Barclays
Goldman: We receive the December FOMC Minutes on Wednesday, which we will be watching for discussion of potential policy changes under the new administration, as well as the rationale behind the hawkish shift in thedot plot.
UBS: The December meeting minutes may reveal more colour on the rationale behind the evolution of the dot plot and the lack of a shift in economic forecasts. Our economists believe the latter is perhaps due to Fed officials taking a “wait and see” attitude regarding the impact of potential fiscal and other government policy changes. We maintain our view that the Fed will tighten via two rate hikes in 2017.
Barclays: We believed coming into the meeting that members would be reluctant to incorporate policy changes post election. However, despite saying that it is “far too early” to judge the effects of fiscal policy, Chair Yellen noted that “a few” members incorporated policy changes into their forecast. These adjustments did not change the range of member forecasts and we look to the minutes for clarity on how potential policy changes may have influenced the outlook. In addition, we look to the discussion to judge whether the FOMC sees fiscal stimulus as likely to substantively boost potential output. Yellen took a dim view on this possibility and hence is likely to advocate faster rate hikes in response to a large increase in spending.
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