US: FOMC minutes in focus today – MUFG

With monetary policy divergence likely to be a key driver of dollar movement in the early part of this year, the FOMC minutes from the meeting in December to be released this evening may prove important suggests Derek Halpenny, European Head of GMR at MUFG.

Key Quotes 

“Given the Fed obviously raised rates and also upped the DOTS profile for this year from two hikes to three hikes, the details of the minutes may prove important for the markets. Yellen has already told us that some of the FOMC altered their end-2017 fed funds estimate based on expectations of fiscal expansion under President-elect Trump even though we don’t know what that might amount to. So it might not take much for the median to drop back again.”

“Hence, what is more important to us in reading tonight’s minutes will be any changes to the assessment of the economy that are beyond Trump’s fiscal influence. That would be more meaningful and suggest resilience in the Fed’s thinking on a faster pace of tightening even if Trump was to disappoint on the fiscal side.”

“It is also worth remembering that the voting FOMC members have changed and hence the DOTS might not reflect the more dovish voting in 2017 relative to 2016. Out go Fed Presidents George, Mester, Bullard and Rosengren and in come Evans, Harker, Kaplan and Kashkari. Three of those four 2016 Presidents (all but Bullard) voted to hike last September and hence the incoming 2017 Presidents are likely to have a more dovish leaning than last year’s. The median DOTS message needs to be viewed in the context of not knowing which DOTS belong to which Presidents.”

“Our hunch is that the minutes might reveal a greater degree of caution over the outlook for the economy than one might expect given the DOTS increase for this year.”