When reading any release of Fed minutes, one must remember they summarize a meeting held three weeks before, and as such, may seem stale by the time they are distributed. That I suspect will be the reaction of many who spent Wednesday afternoon poring over all 19 single-spaced pages typeset in small font.
Since the January 26–27 meeting these minutes cover, Fed Chair Janet Yellen has spent two days on Capitol Hill offering her semiannual testimony to Congress on monetary policy, and Vice Chair Stanley Fischer did an on-the-record session at the Council on Foreign Relations. So based on these recent appearances, we know what the Fed leadership thinks about the outlook for the U.S. economy, inflation and policy rates, and the January minutes simply provide some color, detail and supporting narrative. In brief: The Fed believes the labor market is strong and consumers and companies – outside the oil patch – are in good financial shape. But the strong U.S. dollar and financial turmoil originating abroad depress global demand for U.S. exports, and the front-loaded costs of plummeting oil prices have yet to be offset by extra demand from importers and consumers of oil.
In such circumstances, the Fed is focused less on its forecasts for inflation and is paying more attention to actual inflation. “Watchful waiting” is a term often used to describe the Fed thus far in 2016, and the description is apt. But this is a Fed that still thinks it made the right call to commence policy normalization in December 2015 and that still holds to a baseline view that more hikes will be appropriate later in 2016 – although not at the next Fed meeting in March, and likely not in April, either.
As for markets, the Fed remembers perhaps better than some of today’s headline writers that in January 2015, the S&P 500 was volatile and finished down for the month while 10-year U.S. Treasury bond yields fell 50 basis points from 2.1% to 1.6%. Four months later, stocks were at an all-time high and 10-year Treasury yields broke through 2.4%. So beware of those who say rate hikes are off the table for 2016. Especially if oil prices establish a bottom and the Chinese economy avoids a hard landing – both of which are part of the PIMCO baseline view – the Fed will be in play sooner than many in the markets now think.