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FOMC Minutes Preview: Janet's Farewell

Submitted by RanSquawk

The FOMC will release its meeting minutes from the December 2017 meeting at 2pm ET today. The central bank hiked by 25bps in December, and now sees seven hikes over the forecast horizon vs six previously.

Meanwhile, despite raising its GDP forecast - supposedly due to the fiscal stimulus - the Fed kept its inflation forecasts unexpectedly unchanged, something which prompted lots of confusion at Yellen's last Q&A. In any case, market reaction today will likely be limited given that the voting rotation has changed.

Rates:

As was widely expected, the FOMC hiked the Federal Funds Rate target by 25bps to 1.25%-1.50%, the third of 2017, and the fifth of this hiking cycle.

There were two dissents – Charles Evans joining Neel Kashkari in the dovish dissenter camp – leaving the vote at 7-2 to hike. It is, however, worth noting that both will be off the voting rotation in 2018, which most analysts presume will tilt slightly towards the hawkish end of the scale.

Accordingly, the meeting minutes may have little market impact, with traders more likely to focus on speeches from the 2018 voting contingent (Cleveland Fed’s Loretta Mester is due to speak this week following the release of the minutes, while San Francisco Fed’s John Williams is set to speak over the weekend).

However, the meeting minutes may provide color around how quickly the Fed will hike. “We expect continued widespread concern about inflation and wage data, which will be crucial factors for the tightening pace in the coming year,” Nordea writes.

“However, the concern about weak inflation will likely be offset by the Fed members’ increased optimism about higher growth (partly due to the effects of the tax reform) and a lower unemployment rate next year.”

Projections:

Projections for the trajectory of the rate hike were little changed in the long term, however, the central bank seems to look for rates to be above 3% in 2020, meaning that it has pencilled in seven hikes over the forecast horizon, versus a prior six.

The growth projections were upgraded for 2018 on the back of US fiscal reform. PCE and core PCE inflation projections were unchanged, with the 2.0% target estimated to be achieved in 2019.

Analysts at Capital Economics are more hawkish than the FOMC and also analyst consensus, argue that a stronger inflation rebound in 2018 will persuade the Fed to hike four times in 2018.

In terms of the labor market, the Fed trimmed its unemployment rate forecast slightly further, though left its longer term forecast unchanged.

Statement:

The statement was tweaked slightly. “Most of the changes remove language relating to the impact of the  hurricanes on the employment and inflation data,” Westpac writes, “the new statement indicates that the bulk of those impacts have passed and will not materially impact the economic outlook.”