FOMC Minutes: Is it really enough for a June hike?

If this was an opportunity to keep a June hike on the cards, the Fed certainly took it. We were skeptical, but the dollar certainly reacted positively, even if a hike is not a done deal. In any case, here are two different opinions:

Here is their view, courtesy of eFXnews:

FOMC Minutes: Hawkish Fed Considering June Hike; All Eyes On Eco Data – SEB

It was our take that the FOMC decision at the April meeting was hawkish since the Fed evidently kept the door ajar to rate hikes in upcoming meetings. For one thing, the Fed did not seem overly worried about the weak growth in the first quarter; while growth was downgraded from “moderate” to “has slowed” the very first line set the tone and instead of focusing on the weak growth the Fed said that the labour market has improved further. Indeed,  the minutes today gave a hawkish impression too with most Fed officials seeing a June hike likely if the economy so warranted. This time, markets got the message.

Speculations ahead of the meeting were focused on the wording around the risks to the outlook, At the April meeting, instead of saying that risks were broadly balanced as we had speculated the Fed removed the reference to global risks altogether – a clever way of keeping its options open in our view. Now according to the minutes  several officials judged that the risks to the outlook were broadly balanced while some officials cited BREXIT and China currency concerns as risks. However,  many others indicated that they continued to see downside risks  to the outlook either because of concerns that the recent slowdown in domestic spending might persist or because of remaining concerns about the global economic and financial outlook.  So all eyes on economic data going forward  since those remaining Fed growth pessimists would likely fall silent if the upturn in US economic data stays on course.

Against the backdrop of most officials eying June, it is not surprising at all that recent comments have suggested that Fed officials were uncomfortable with markets basically pricing the Fed out. But  more recently the combination of hawkish speeches and better economic news have pushed markets into pricing in a higher probability of Fed hikes, yesterday the probability of a June hike was just 4% compared to 30% today (was 14% before this release). While  a September hike still is the baseline, the minutes are clearly suggesting that  risks are skewed towards an earlier date.  If so, the odds may favor the July 27th  meeting given that the BREXIT referendum is just a week after the June meeting.

Quick Take: FOMC Minutes – CIBC

Last month’s Fed meeting was seemingly uneventful on the surface, but while they discussed raising rates in June participants may not have enough information to justify a tightening. Most participants agreed that if growth rebounds, employment continues to strengthen and inflation picks up that a June rate hike could be appropriate. However, that’s a lot of ifs and participants generally didn’t agree whether these would be satisfied in time.

Moreover, the easing in both core CPI & PCE since the meeting suggests that one of those three criteria isn’t moving in the right direction. As has been the case for sometime, many officials downside risks and that the incoming information might not be sufficiently clear in the near-term to warrant monetary tightening. That said,  it appears that officials are concerned that the market had completely priced out any chance of a rate hike in June and barely any chance this year.

Overall, the minutes suggest that the Fed may give out some more hawkish signals over the next few months, especially if data comes in better, but that they won’t have enough information to hike rates in June.

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