Key Points: -

- The Federal Open Market Committee (FOMC) thought it was prudent to wait for further evidence that recent weak data was transitory before hiking again.

- Officials said they expected weakness would pass and that it would “soon be appropriate” to raise rates if those expectations were met.

- In general, Fed officials said their assessment of the economy had changed little since the March policy meeting, with the labour market continuing to improve and risks from the global economy receding.

- Most Fed officials viewed recent soft inflation as “transitory,” though a few raised concerns that progress toward the central bank's 2.0% target had slowed.

- Fed staff presented a plan to set gradually increasing limits on balance sheet reinvestment that would start low and be raised every 3 months until fully phased in; nearly all viewed proposal as favourable.

The Release: -

The FOMC noted that the Q1 slowdown was transitory, however, the Committee noted that it was prudent to wait for further evidence that the weak string of recent data was transitory before taking the next leg up on its hiking cycle.

The Fed did highlight that “risks to the forecast for real GDP were seen as tilted to the downside,” while the central bank noted that it does see possible upside risks from President Trump’s proposed expansionary fiscal policy, although there is a high degree of uncertainty around the matter.

A closer inspection of the minutes also shows that “a couple of participants indicated that increasing the target range for the federal funds rate at the current meeting would be warranted by their economic outlook, but they also noted that maintaining the state of current policy for now would be consistent with the Committee’s gradual approach.”

This shows growing divisions amongst voting members, with Philadelphia Fed President Patrick Harker and perhaps Dallas Fed president Robert Kaplan the two most likely candidates to voice their hawkish intentions. Minneapolis Fed president Neel Kashkari has continued to strike a dovish tone. Remember he was the sole dissenter last time the Fed hiked (back in March), and he used a speech yesterday to note that the recent pull back in inflation was worrying, and stress that he needed to see more data before deciding on a June hike.

Ahead of today's FOMC minutes, UBS reminded us that there has been substantial turnover on the FOMC.

While many of the actors are well-known, there are some unknowns and unfamiliar faces, with more to come. The biggest unknowns are Raphael Bostic, the new President in Atlanta and how the Richmond Fed will factor into the debate after Jeffrey Lacker's departure. In addition, with tspanee vacancies on the Board and Chair Yellen and Vice Chair Fischer's terms ending early next year, there will be considerable turnover.

Looking Forwards: -

In terms of balance sheet normalisation, the FOMC noted that it discussed a staff paper proposing that the balance sheet roll-off should begin at a "low" pace, increased gradually every tspanee months, circumstances permitting, until a pre-determined maximum pace is reached. So once again the Fed offered little detail on the most pertinent subject matter. It did highlight that "nearly all" members were happy with this approach, and agreed it should start this year.

The recent political cloud gathering over Washington and some softer than expected US inflation data has raised some questions over a June hike (which many suggest is a “done deal”). Fed Fund Futures were pricing in a circa 80% chance of a 25bps hike at next month’s meeting heading into the release of the minutes, and held fairly steady post-minutes.

The same instrument was pricing in a mere 50% chance of two 25bps hikes tspanough year end as we approached the minutes (while the middle dot in the Fed’s dot-plot is looking for 3 hikes in total this year), with the odds paring back to around 45% post-release.

In terms of broader market reaction, the USD and treasury yields backed up following the release as the Fed sounded a little more uneasy about the domestic economic outlook (although it suggested that the assessment of the economy had changed little since the March policy meeting) and no real detail was given on balance sheet normalisation.