Well, it’s difficult to know exactly what to make of the Fed minutes.
There was talk of a possible bubble in risk assets. There was discussion of letting the balance sheet roll off. Etc.
At a certain level it makes sense that the dollar fell. After all, if they’re going to use the balance sheet to tighten, that kind of suggests they may be able to skip an outright hike or two. But you’ve gotta think that the Minutes were at least somewhat hawkish, which makes it all the more unnerving (for the reflation narrative anyway) that despite the talk of balance sheet shrinkage Treasury yields just couldn’t seem to move higher – even after a blockbuster ADP print. Indeed, the following chart looks anything but “reflation-ish“…
Here to (try and) make sense of things is Goldman, who thinks the Minutes were, on balance, “mildly hawkish.”
Via Goldman
1. The minutes of the March FOMC meeting contained a relatively upbeat assessment of economic conditions and noted potential upside risks from fiscal policy and financial conditions. Participants viewed the labor market as continuing to strengthen and broader economic activity as continuing to expand at a moderate pace, and the staff projection noted that the slower apparent pace of first quarter GDP growth likely reflects “transitory factors.” The minutes also noted the brisk pace of year-to-date payroll growth and the “moderate” rise in labor compensation measures. Consumer sentiment was described as “elevated,” and the staff viewed consumption as likely to grow at a moderate pace in early 2017. The minutes also included a somewhat more positive view on capital expenditures, noting a likely increase in the first quarter following the moderate gain in Q4. The minutes also noted the recent rise in headline inflation but characterized core inflation trends as “little changed.”
2. Consistent with recent comments from Fed officials, the minutes again noted that participants see considerable uncertainty about the fiscal outlook, reporting that “about half” of participants did not incorporate an explicit assumption in their projections. Additionally, a “number of participants” discussed potential upside risks from financial conditions —though they also noted the possibility of downside risks in the event of a risk-off move in financial markets. Some participants also characterized equity valuations as “quite high,” noting that the equity risk premium is in the bottom quartile of its historical range.
3. Most participants judged that a change to reinvestment policy “would likely be appropriate later this year.” Several participants indicated that the timing should be tied to the target federal funds rate. Policymakers generally preferred to phase out or cease reinvestments of both Treasuries and MBS. The minutes did not indicate a clear preference for gradual tapering of reinvestments over immediate ceasing, but noted that a gradual strategy would reduce the risk of financial market volatility, while an immediate end would be easier to communicate and allow for swifter normalization of the balance sheet. Nearly all participants agreed that the Committee’s intentions regarding reinvestment policy should be communicated to the public well in advance of an actual change and several participants suggested communicating the terminal size and composition of the Fed’s balance sheet.
4. Overall, the mildly hawkish minutes increase our confidence that balance sheet normalization will be announced this year and are also marginally supportive of a June hike. We have not changed our subjective probabilities of the timing of the next move in the federal funds rate. We still see a 60% subjective probability that the next hike occurs at the June 2017 meeting, 10% for July, and 20% for September.
