Fra BNP Paribas:
US FOMC minutes: Gradual and vague What stood out to us in the minutes of the FOMC’s 16 December meeting were the discussions of low inflation and the fact that “many” participants were more uncertain about the inflation outlook and/or saw “important” downside risks to their forecasts.
The bulk of the discussion on the pace of rate hikes was focused on explaining why participants think “gradual” adjustments will be appropriate. There was almost no discussion (with the exception of the “dots” included in the appendix) of what “gradual” actually means to the FOMC.
The minutes revealed that for “some members,” the decision to raise the target range in December was a close call, particularly given the uncertainty about inflation dynamics. We were not surprised by this. By our metrics, “some” means three to five participants. We can easily account for three of these participants – Chicago Fed President Evans and Fed Governors Tarullo and Brainard.
All three were voters in December. Inflation “Almost all” participants expected downward pressure on inflation from energy and commodities prices to be transitory, but “many” viewed the persistent weakness in those prices as “adding uncertainty or posing important downside risks to the inflation outlook”. However, a “majority” still saw the risks to the outlook for inflation as “balanced” in December despite these uncertainties. Declines in survey measures of inflation expectations were largely dismissed.
A number of participants thought that energy price declines might have influenced these measures, similar to “historical patterns”. Fed’s reaction function The minutes provided less information about the Fed’s reaction function than we were hoping for. What they confirmed was strong support for a gradualist policy. Numerous justifications were offered:
1) to support further improvement in labor market conditions and exert upward pressure on inflation; 2) because it will take time to confirm that inflation is on a trajectory to return to 2 percent over the medium term; 3) to assess how the economy responds to increases in interest rates; 4) because the neutral short-term real interest rate (which by several estimates is close to zero) is only expected to rise slowly over time as headwinds recede; and 5) because monetary policy is less able to respond to negative shocks when rates are low. What next? We continue to see high odds of a March hike, in the neighborhood of 80%.
Inflation data released leading up to the March meeting are unlikely to increase worries and/or uncertainties about inflation returning to target. These concerns could even recede a little if core inflation evolves in line with our forecast. Base effects from energy prices should start to lift annual rates of headline inflation more notably starting in January, which, in addition to continued improvement in wage growth, should also bring some mild reassurance to policymakers.
BNP Paribas Fed call We expect 3 rate hikes in 2016, with a pause likely in Q4. We see high odds (roughly 80%) of another rate hike at the March FOMC meeting.
