Fra BNP Paribas.
The January FOMC statement was hawkish, with the Committee upgrading its economic assessment and language around inflation.
We expect the minutes to capture the sentiment to its upgrades, and will be looking for its take on the drivers of the reacceleration in activity.
Our key focus in the minutes will be looking for clues as to whether “further gradual
increases in the federal funds rate” implies more rate hikes. We interpreted the January FOMC meeting statement as hawkish. The Committee upgraded its assessment of the economy, now viewing everything – employment, household spending, and business fixed investment – as “solid”.
Additionally, it upgraded its inflation language, saying it expected it to “move up this year” rather than “remain somewhat below 2% in the near term,” as well as acknowledging that marketbased measures of inflation compensation “have increased in recent months.” Moreover, it noted that the Committee expects to deliver “further gradual increases in the federal funds rate.”
Unquestionably, there is a feeling in the Committee that the economy is stronger than
previously expected. Spurring the statement changes, likely, was the passage of tax reform in addition to a very strong Q4 GDP print (please see: US GDP: Domestic demand exploding).
Given heady Q4 consumption of 3.8% q/q saar, and “many” participants expecting the proposed cuts in personal taxes to provide some boost to consumer spending, we will likely see the minutes justifying the upgrade to household spending growth. But the upgrade to the investment outlook, since investment is inherently forward-looking is a very important change that should not be overlooked.
Discussion of the reasons for stronger-than-expected growth will be interesting, with our focus being on two possible lines of argument. First, that economic re-acceleration H2 2017 stems from easier financial conditions and second, that trend growth may be accelerating, and with it, the equilibrium real interest rate, r*, may be rising.
Both, along with the addition of the word “further” with respect to the expected pace of rate hikes, look to be a hint of more rate hikes than the December dot plot reflected.
The FOMC’s take on inflation weakness through 2017 is that it was largely due to idiosyncratic factors, and that the Committee continues to expect inflation to move up to 2.0% in the mediumterm.
Indeed, the December minutes summarized the Committee’s understanding of inflation
prospects – that “participants generally viewed the medium-term outlook as little changed, and a majority commented that they continued to expect inflation to gradually return to the Committee’s 2 percent longer-run objective.”
