The FOMC meeting minutes talked about hiking relatively soon, but did not provide a smoking gun and the US dollar dropped. Various commercial banks have reacted to the publication, which also consists of talk about a reduction in the balance sheet. Nevertheless, a hike in June is a common thread. Are they correct?
Here is their view, courtesy of eFXnews:
FOMC Minutes: Fed En-Route To Hike In June & September – SEB
SEB Research comments on today’s FOMC minutes from the May-3rd meeting.
“Today’s minutes provides a description of an operational approach to reduce the size of the balance sheet that “nearly all policymakers expressed a favourable view of”. The proposal means that a set of gradually increasing caps (limits) on the dollar amounts of Treasury and mortgage backed securities that would be allowed to run off each month will be announced,” SEB notes.
“….To summarize our assessment of the minutes, we stick to our forecast that the Fed will hike rates in June and September.
Market pricing did not change much after publication of the minutes and still suggests a very high probability of a rate hike. The most interesting aspect of the minutes was the description of the approach to reduce the balance sheet. December still looks like a probable starting point,” SEB argues.
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FOMC Minutes: 2 Tightening Paths – Barclays
Barclays Capital Research comments on today’s FOMC minutes from the May-3rd meeting.
In particular, Barclays outlines 2 tightening paths for the Fed over the remainder of the year.
1- (Barclays’ base case) “We interpret the FOMC minutes as consistent with our view that the Fed is likely to raise more times in June, and September, and proceed with balance sheet runoff in Q4,” Barclays argues.
2- “That said, the language could also be interpreted as a hike in June, balance sheet runoff in September, followed by another rate increase in December,” Barclays adds.
FOMC Minutes: How Fast? How Much? – Credit Agricole
Credit Agricole CIB Research comments on today’s FOMC minutes from the May-3rd meeting.
1- As the economic expansion continues, the FOMC believes that the policy accommodation arising from its large balance sheet should be gradually removed.
2- We look for the Fed to shrink its balance sheet, possibly beginning in December with the aim of reducing it over time by about USD2.5trn.
3– We look for a modest, controlled pace of reducing reinvestment amounts in order to avoid disrupting markets and to smooth out the reinvestment process. That could be consistent with a reduction of USD200-250bn in 2018, say, USD20bn a month split equally between MBS and Treasuries.
FOMC Minutes: ‘More Gradualism And Fine Tuning’: 3 Takes – CIBC
CIBC Research comments on today’s FOMC minutes from the May-3rd meeting. In particular, CIBC outlines the following 3 takes from the minutes:
1- The FOMC members put their weight on strong employment growth rather than weak GDP in Q1, a reason why the Fed statement continued to lean towards rate hikes ahead.
2- The weakening in the dollar and longer term yields were cited as an easing in financial conditions, and we view that as a factor tilting towards a rate hike in June. Indeed, a “few” members wanted to hike in May but didn’t dissent given the desire not to shock the market with an unanticipated hike
3- One new item: the FOMC discussed a plan to have the balance sheet reduction done through setting a new cap each quarter on how much of the balance sheet would roll off, with the rest of the maturities/coupons reinvested, and the initial cap set quite low
“More gradualism and fine tuning, in other words, by a Fed that wants to carefully manage how the yield curve responds,” CIBC concludes.
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