FOMC Minutes Preview: Don’t Expect The Fed To Reveal Much

Submitted by RanSquawk

The FOMC meeting minutes are unlikely to reveal much by way of new information, and will likely reiterate the points made within the post-meeting statement, post-meeting press conference with Chair Powell, as well as Powell’s views expressed in his recent dual-testimonies to lawmakers. The Fed is monitoring the impact of the coronavirus, and there will be a great deal of attention on any commentary around this theme, given tech-giant Apple recently cut guidance due to the outbreak; the Fed is likely to reiterate that it would need a substantial shift from its baseline for it to tweak policy settings. Additionally, traders will be eyeing any commentary that gives insights into the course for the Fed’s repo operations, as well as any commentary on the upcoming policy review. Minutes will be released at 1900 GMT/1400 ET on 19th February 2020.

MEETING RECAP:

At the meeting, the Fed held rates between 1.50-1.75%, though it did hike the IOER by 5bps to 1.60%. The statement saw a couple of subtle changes too: the FOMC’s view of household spending activity was downgraded to “moderate” from a “strong pace” (perhaps a little stronger than some were expected – some argued that it would be downgraded to ‘solid’), while its view on inflation is now that it is “returning to” target (from “near” target).

FED REPO OPERATIONS:

The Committee said repo operations would continue through April, when corporate tax season might cause funding pressure. Additionally, it said it would be continuing to buy TBills through Q2. Powell also explained that the Fed intends to continue its purchases of bills in order to provide ample reserves and better control rates, noting that the Fed would eventually slow purchases to a pace that would allow the balance sheet to grow in line with its liabilities (Powell intimated that the balance sheet size floor would remain around USD 1.5trln), and that the Fed intends to gradually transition away from repo ops. Capital Economics estimates the Fed will need to continue expanding its T-bill holdings by something like USD 10bln per month in perpetuity in order to meet its liabilities. Traders will also be eyeing any commentary about the Fed’s willingness to purchase Treasuries with shorter-dated maturities, in order to avoid crowding the bills market.

POWELL PRESSER/TESTIMONY:

Speaking in his capacity as Fed chair, Powell largely stuck to his script during his semi-annual testimony to lawmakers, echoing much of his post-meeting press conference; the meeting minutes will likely be a copy and paste job. Powell again said growth is moderate, policy is appropriate, trade uncertainties have diminished, global growth is likely stabilising. Powell was specifically asked about the conditions the Fed would need to see before responding via policy adjustments; the Fed chair drew the differences between temporary and persistent factors, and intimated that it would need a larger and more sustained drag on the domestic economy than envisioned in its baseline.

CORONAVIRUS:

While trade uncertainty was lifting, virus fears are hijacking the narrative. And the Fed chair had a bit more to say about the coronavirus outbreak (it also got a mention in the Fed’s report to Congress), noting that the Fed was closely monitoring the situation, though it was difficult to assess the economic impact currently; a hit to Chinese growth was likely, Powell said, and this may be felt in the US too via Chinese imports or supply chain disruptions.

MARKET PRICING:

In wake of the FOMC meeting, money market pricing was little changed, implying around 33bps worth of cuts through the end of this year (note: the FOMC has forecast no changes to the FFR rate this year; it will next update forecasts at its March meeting on 18th March). Currently, money markets have priced about 41bps of easing, though that pricing may be a function of market jitters over coronavirus, which is hitting supply chains. And this has caught the attention of a few desks, which have noted that the Fed went from being the middle of the pack, in terms of central bank easing pricing, to leading; UBS said this stands out, since the data in the US has actually been good, and the RBA and RBNZ, who are actually more exposed to China, stood firm. “The outperformance of Fed pricing relative to other central banks seems to indicate that a certain amount of downside risk is now in the price, which further raises the threshold for the coronavirus narrative to surprise to the downside,” UBS wrote.

STRATEGY REVIEW:

The minutes are unlikely to give any specific guide on the process, which is expected to be completed by the middle of the year. With that said, some suggest that officials may have discussed changes to the policy framework, which may include thoughts about switching to an average inflation target, or adjusting language within the statement to allow inflation overshoots after periods of undershoots — such a theory has been given credence by the statement changes on inflation.