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Fed's Goldilocks Minutes: Hawkish On Growth And Inflation But Not Enough For 4 Hikes

Market-implied expectations for the number of rate-hikes in 2018 surge to new cycle highs (2.82 hikes) ahead of the minutes (and the dollar had crept higher with them).

Since The Jan 31st Fed meeting, everything is lower (gold least, stocks most)...

And The Minutes did not disappoint with regard to a hawkish tilt...


Definitely has the sound of a Fed with several members that are worried about being 'behind the curve', but there was a goldilocks-like expectation among some that growth will rise but there's no need for more rate hikes.

To be sure, the Fed is confident that the economy is gaining momentum, as a number of participants said they had marked up their growth forecasts since the previous month, encouraged by firm global growth, supportive financial markets and the potential for US tax cuts to boost the economy more than expected. Still, others said the “upside risks” to growth may have increased, according to minutes of the gathering.

Meanwhile, the Fed still has no idea why wages aren't rising faster as the following excerpt reveals:

During their discussion of labor market conditions, participants expressed a range of views about recent wage developments. While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data. With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of onetime bonuses or variable pay rather than a permanent increase in wage structures. It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low. That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.

And since wage growth, a dovish Goldilocks is set to continue, the market was happy enough and risk has blasted off.

Some more dovishness: the Fed largely continues to ignore the flattening yield curve, although the minutes did note that "a few" noted the "strong association between past yield curve inversions and recessions." Here is how the Fed saw the recent move in the yield curve:

One participant reported that financial market contacts did not see the relatively flat slope of the yield curve as signaling an increased risk of recession. A few others judged that it would be important to continue to monitor the effects of policy firming on the slope of the yield curve, noting the strong association between past yield curve inversions and recessions.

* * *

Bloomberg highlights the key takeaways from Fed minutes lockup:

One of the money quotes:

"A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate"

FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook

Some doves - put Kashkari here - countered back, namely that the Fed may once again fail to hit its inflation target:

"Some participants saw an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient"

Speaking of inflation, goldilocks returned with price pressures neither too hard, nor too soft:

"Participants anticipated that inflation would continue to gradually rise as resource utilization tightened further and as wage pressures became more apparent"

Here the doves countered again, warning that corporate tax cuts could lead to lower wages:

A few participants posited that the recently enacted corporate tax cuts might lead firms to cut prices in order to remain competitive or to gain market share, which could result in a transitory drag on inflation."

Still everyone agreed that the Fed's arbitrary 2% inflation target would be hit... eventually... maybe:

"Almost all participants continued to anticipate that inflation would move up to the Committee’s 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong"

Going back to the core question, 3 or 4 hikes, Bloomberg's chief US economist, Carl Ricadonna, makes that case for the former, by making the distinction between "further" and "faster":

"Further" does not equal "faster" in the FOMC minutes... at least not in 2018. Policy makers appear willing to maintain their projected pace of three rate hikes this year, but perhaps to extend this pace further into the future in light of stronger growth prospects due to fiscal policy.

A number of FOMC participants indicated that they had marked up their forecasts for economic growth in the near term vs their December estimates;

economic impact from recent tax cuts "might be somewhat larger in the near term than previously thought''

"Participants general noted few signs of a broad-based pickup in wage growth in available data"

Meanwhile, the traditional warning that asset valuations remain elevated will be summarily ignored:

"Amid elevated asset valuations and an increased use of debt by nonfinancial corporations, several participants cautioned that imbalances in financial markets may begin to emerge as the economy continued to operate above potential."

So the Minutes which are less dovish on inflation, hawkish on growth, manage to push the dollar lower? Here are the key lines which according to Citi explain the USD kneejerk lower:

  • Participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields.
  • majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.
  • 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. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the postmeeting statement to point to "further gradual increases" while maintaining the target range at the current meeting.

Full Minutes (link):