Goldman Weighs In On The Fed Minutes

Are you still trying to figure out what to make of the January Fed minutes?

Don’t worry, you’re not alone. For the last four days we’ve variously suggested that Wednesday was likely to be a clusterfuck. Markets were almost guaranteed to be confused by the minutes as everyone was doomed to try and incorporate whatever clues they could glean from the account of Yellen’s last meeting with the econ we’ve gotten since that meeting.

Throw in the market turmoil that unfolded earlier this month and then the additional nod to fiscal stimulus that came along in February (a development that further heightened fears about how the Powell Fed would view the outlook now that an economy at full employment is set to get yet another shot in the arm from poorly-timed expansionary fiscal policy) and the stage was set for precisely what we got on Wednesday afternoon: guessing and then second-guessing.

If you need a recap of the action, you find one here and we detailed the setup just prior to the release here. Suffice to say the initial knee-jerk seemed to have been predicated on some seemingly conciliatory language from the dovish contingent on inflation, but that knee-jerk was quickly reversed once it sunk in that irrespective of any concerns about whether the nascent signs of inflation might prove transitory, the committee is inclined to move ahead as planned. The optimistic take on growth underscored that assessment as did the fact that the move higher in yields seemed to be largely down to hike jitters rather than inflation expectations.

Well for whatever it’s worth, Goldman is out with their take. Here are the main points:

1. The minutes of the January FOMC meeting indicated a more positive view on the growth outlook among the Committee and the staff. Participants continued to characterize growth as “above trend,” and they cited recent tax legislation, the global economic outlook, and easier financial conditions as supportive of growth “over coming quarters.” The staff upgraded their GDP forecasts relative to December and now project the unemployment rate to decline “well below” NAIRU (vs. “below” in the December minutes). But while the Committee continued to cite a strengthening labor market, participants “generally noted few signs of a broad-based pickup in wage growth in available data.” A few participants, however, noted some anecdotal evidence of wage pressures, and a number of participants expected that continued tightening would lead to faster wage growth “at some point.

2. The minutes did not indicate a dramatic change in the inflation outlook, but both the staff and the Committee appear more confident in a return to target. The staff expects core PCE inflation to be “notably faster” in 2018 (vs. “faster” in the December minutes). Additionally, “almost all” participants continued to anticipate a return to the 2 percent objective over the medium term, and “several” members commented about both “upside and downside risks” to the inflation outlook.

3. The minutes also helped to clarify what the FOMC intended by the addition of “further” to the description of future rate hikes in its January statement, noting that “Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.” While the minutes did not add much on this point, we took the earlier addition of “further” as hawkish.