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March FOMC Minutes – Not as dovish as expected

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The minutes of the Federal Reserve’s Open Market Committee was released yesterday for the meeting in March. The minutes overall showed a neutral to hawkish outlook from the Fed members. Obviously, the US Dollar rallied as the markets were inclined to see a more dovish tone in the minutes based on the assumption that the Fed had revised down their forecasts for the year.

The main highlights of the March FOMC meeting minutes were:

Several members favored a June rate hike: According to the meeting minutes, the Fed members favored a rate hike in its June meeting but the hawkish view was broadly divided. The opponents to the rate hike in June cited the appreciating dollar and the decline in Oil prices stating that these factors would continue to put downward pressure on inflation and instead called for a rate hike in September. Few members wanted to see rate hikes put off until 2016.

Regardless of the divided opinion, it is starting to look increasingly likely that even if the Fed holds off a rate hike at its June meeting, a rate hike in September is definitely on the table.

Reasonably confident: The Fed members noted that the pickup in the labor markets would eventually help boost inflation towards its target of 2% and if energy prices started to stabilize, the Fed members believe it would be more confident that inflation would turn around.

Fed’s asset sales: The minutes also revealed a discussion about offloading the assets accumulated by the Federal Reserve during years of its quantitative easing stimulus program. The FOMC members noted that selling the assets within the short term could be an option but cited risks of the market reaction to such an event and also the lack of reason for doing so.

Besides the topic of interest rates, another factor that is being less discussed is how the Federal Reserve would start unwinding its purchases of assets accumulated via the Fed buying bonds and mortgage backed securities.

The fact that this was discussed in the March meeting is reason enough to ascertain that the Federal Reserve is indeed looking to move the US economy from an easy and accommodative monetary policy towards normalization of rates.

Market Reaction – March FOMC Minutes

The markets went into the FOMC minutes event hoping to see a more dovish undertone. The clear lack of a dovish outlook from the Fed members saw the US Dollar strengthen across the board overnight. EURUSD continued its decline along with other commodity risk currencies. Gold futures also dipped back below the $1200 psychological handle after the markets realized that the minutes were indeed hawkish.

The US Dollar Index reacted positively to the news, keeping up its bullish momentum after making an intraday low to 97.5, eventually closing the day above the previous day (April 7th) highs of 98.25.

However, there are still lingering doubts about the Fed as the minutes published were from before the March jobs report. The biggest question on everyone’s mind is if the slowdown in the labor market was merely a blip on the radar rather than hint at an underlying weakness in the US economy. Some Fed officials in recent speeches have acknowledged the fact that the Q1 growth in the US economy tends to be generally weaker and that the economy should and probably could pick up steam from the second quarter.

From a seasonal perspective as well, this has been the view and something that we pointed out quite recently.

Combining the above factors, it is very likely that while uncertainty towards the Fed rate hike in June, should economic data pick up in the second quarter of this year, the Federal Reserve could very well start to raise interest rates around its September meeting.

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