Daily Commentary BY THE CURVE TEAM –

Cracks Appear at FOMC

24th of May, 2017

In the minutes from their May meeting, the FOMC did it’s best to reiterate their view that the dip in the data and economic activity is only transitory. The word ‘transitory’ itself appeared at least 10 times in the release. However, they undid all the hard work with one sentence and in doing so cast some doubt over the timing of the next move.

Judging by the markets reaction, the market took the minutes to being more dovish than what had been expected. The reason for this assessment is likely due to this sentence:

“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.”

This prudent approach and the wording used above is something that we have become used to reading in FOMC commentary for some time. In the lead up to the minutes, the market was widely expecting the FOMC hike to be when they meet in June. While a hike is still widely expected according to market pricing, expectations have been trimmed following the minutes.

The reduction of the Fed’s balance sheet was also discussed at length, almost to the point where it could be seen as downright confusing. Essentially the unwind of the balance sheet or what might become known as quantitative tightening, will be slow at first until it will gradually increase until a pace that the FOMC deems appropriate is reached.

What is yet to be made clear is how the unwinding of quantitative easing will effect the pace of interest rate normalisation.

David Flanagan

Director - Interest Rate Markets