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  • Fed Brief

    Jan 26 2015 - December FOMC Minutes: This, That, and the Other Thing

    If nothing else, the minutes from the FOMC meetings are a study in the differences of opinion. Everybody's got one and everybody shares their thoughts on a wide range of policy-sensitive topics.

    Of course, the only thing market participants want to understand is when the FOMC is going to make a change in its monetary policy. That question is the four trillion dollar-plus question these days, and with the latest minutes from the December 16-17 FOMC meeting, there was again no definitive answer.

    Several participants thought this, many thought that, and a few felt otherwise. That is the essence of the FOMC meetings. All are called to share their thoughts, but only twelve -- or ten in this particular case -- get to vote (there are currently two vacancies on the Board of Governors).

    At the December meeting, three voters dissented.  The who and the why of those dissents is not entirely relevant now since the composition of the FOMC changed on January 1, ushering in a new gaggle of Fed presidents who have a more dovish disposition in aggregate than the FOMC class of 2014.

    That disposition aside, the latest minutes once again stressed the need to communicate the idea that the timing of the first increase in the federal funds rate would depend on the incoming data and their implications for the Committee's assessment of progress toward its objectives of maximum employment and price stability.

    Concerns were noted about economic troubles abroad potentially spilling over and slowing the recovery in the U.S., yet it was also noted by some participants that recent domestic economic data increased their confidence in the outlook.

    It all continues to be pretty wishy-washy stuff three weeks after the market has already parsed every word in the policy directive and dissected every word Fed Chair Yellen uttered at her press conference on December 17.  It is perhaps only fitting that the stock market didn't move much immediately after the release of the minutes.

    We would concede, however, that there was one particularly interesting acknowledgment in the minutes from the December 16-17 FOMC meeting. That acknowledgment was this:

    "With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time."

    It was a peculiar glimpse into the Committee's thinking, because it amounted to the FOMC prepping the market to consider the idea that total PCE inflation won't necessarily be the signpost on the inflation side of the Fed's mandate for influencing policy decisions.

    With its belief that the impact of low oil prices and the stronger dollar is going to be transitory, the FOMC will find some justification it seems in core inflation, which excludes food and energy prices, to rationalize a rate hike decision.  In the Fed's words, though, it will still have to feel pretty good that the transitory factors of low oil prices and the strong dollar have shifted in such a way to suggest that total inflation stands a solid chance of moving back toward 2 percent over time.

    The latest data from the November Personal Income and Spending report showed the PCE Price Index up just 1.2% year-over-year, down from 1.4% in October.  Core PCE was up 1.4% year-over-year versus 1.5% in October.

    Oil prices have fallen further since the November Personal Income and Spending report was released and it is likely that total PCE will continue to trend lower with the December report.  If core PCE stabilizes and starts to trend higher, though, it is sure to draw more interest as a force driving the market's expectations for the timing of the first rate hike.

    The fed funds futures market is currently assigning a 62% probability to the first rate hike occurring at the September 2015 meeting.  That's roughly the same as it was before the release of the minutes for the December 16-17 FOMC meeting.

    Like the FOMC, the market will continue to watch incoming data to gain a perspective on when the timing of the first rate hike would be appropriate.  It's still an open four trillion dollar-plus question, but it stands to reason that the core inflation data will be looked at more closely now as the other thing for some answers.

    --Patrick J. O'Hare, Briefing.com

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