Let the excessive extrapolation and analysis of the vague transcriptions from a month-old meeting of ivory tower academic economists begin! Heading into today’s FOMC minutes release, traders keyed in the central bank’s description of the Q1 slowdown as transitory: Why was it transitory? To what extent? What would cause Fed officials to start considering it less transitory and more permanent? How does this impact the Fed’s rate hike timeline? Does any of this really matter? Unfortunately, today’s minutes didn’t tell us too much that we didn’t know.
Like the Japanese holdouts who stubbornly fought on through 1945 because they hadn’t heard that WWII was over, some traders were obstinately holding out hope that the Fed would still raise rates in June. Even those traders will likely throw in the towel after hearing it from the horse’s mouth; the minutes stated that many participants “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied,” though a “a few” members still thought a June rate hike was on the table.
Despite this setback for bulls, the minutes reaffirmed that the central bank expected the economy to return to a “moderate pace” of growth. In further clarification of the “transitory” wording from the statement, the minutes showed that members attributed the Q1 slowdown to severe winter weather, a labor dispute in West Coast ports, and a “pattern” of weak Q1 data over the last few years. The only potentially non-transitory factor that the committee honed in on was the recent strength in the US dollar, with the minutes noting that the impact of the greenback’s rally could be “larger and longer-lasting than previously anticipated” and that it was “likely to continue to [restrain] U.S. net exports and economic growth for a time.”
As ever, the central bank maintains its data-dependent outlook, but as it stands, September still looks like the absolute earliest that the Fed would consider a rate hike.
The market reaction to the ho-hum minutes has been predictably subdued, with the dollar first falling 20 pips, then rising 40 pips, and now trading a tick lower from pre-minutes levels against most of its rivals. US equities managed to catch a bid, with all three major indices now trading in positive territory, while the US 10-year bond yield is essentially unchanged at 2.24%.