Highlights of the FOMC Minutes from the Jan 29–30, 2019 meeting

Overall, these minutes appear to have been written to further calm the markets by signalling patience, flexibly and data dependence. The FOMC acknowledges that market volatility has tightened financial conditions at a time when global economic activity has shifted down a gear, primarily due to weakening global activity. Therefore, a more pragmatic approach to monetary policy is required.

It is clear from the comments they are aware that recent communication missteps exacerbated market volatility. The committee remains confident on the outlook for the US economy but, are now undecided as to whether the next policy shift will be a tightening or easing of monetary conditions.

We broadly concur with the FOMC’s assessment. The US economy looks to be in good shape while the risks are coming primarily from the European and Chinese economies. Interestingly, in the few weeks since this meeting those none US risks look to have shifted materially. Anecdotal evidence coming from corporates operating in China suggest that economy is holding up much better than was expected in Q4 2018. In particular, luxury goods companies have reported strong demand suggesting the much-discussed weak demand for Apple’s iPhones is more about Apple’s prices than Chinese demand. On the other hand, the outlook for Europe has continued deteriorating since January with notable signs of weakness in the German Industrial production data.

Overall our assessment of these minutes is the FOMC is shocked and chastened by the market volatility in Q4 2018 and is now likely to err on the side of easier policy for the foreseeable future.

A few of the more interesting passages from the minutes below:

“In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circum-stances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.”

Our translation: if it comes to a choice between inflation and employment, they are not going to damage the labour market for a few tenths of a percent on CPI.

“some market reports suggested that investors perceived the FOMC to be insufficiently flexible in its approach to adjusting the path for the federal funds rate or the process for balance sheet normalization in light of those risks.”

Our translation: We hear you!

“balance sheet normalization process should proceed in a way that supports the achievement of the Federal Reserve’s dual-mandate goals of maximum employment and stable prices. Consistent with this principle, participants agreed that it was important to be flexible in managing the process of balance sheet normalization, and that it would be appropriate to adjust the details of balance sheet normalization plans in light of economic and financial developments if necessary to achieve the Committee’s macroeconomic objectives.

Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.”

Our translation: Balance sheet normalization is no longer on autopilot and may be close to complete. This significantly reduces one of the market’s biggest concerns.