This week’s marquee data release has just dropped, and it’s left traders more confused than ever about the performance of the U.S. economy and the direction of monetary policy. The minutes from the Fed’s mid-March meeting showed a sharp division between Fed policymakers.
In other words, there’s something in this report for everyone. Just like in the children’s story “The Three Bears,” each Fed official has his or her own preferences on when the economy is “too hot” or “too cold,” and it’s up to Goldilocks (the individual trader/analyst) to determine which view will turn out to be “just right.”
Beyond the stark divergence in perspectives on the first rate hike, FOMC participants agreed that the pace of interest rate hikes will be “gradual,” citing the “balanced” risks to the economic outlook and job market. One new tidbit was an increase in the rhetoric surrounding overseas developments and the recent strength in the dollar.
In some ways, the recent strength in the dollar has done some the Fed’s heavy lifting for it: by decreasing the price of U.S. imports and making U.S. exports less attractive, the dollar’s rise is already tapping the brakes on the U.S. economy, decreasing the need for an immediate interest rate hike.
The initial market reaction was toward dollar strength, as the minutes did not explicitly rule out the potential for a June rate increase. As we go to press though, the dollar strength is fading as traders realize that this month’s disappointing NFP report has drastically decreased the likelihood of a hike this quarter. U.S. yields followed a similar tact, with the 10yr yield ticking up 2bps before returning to pre-minutes levels at 1.90%. Finally, U.S. equities are trading a smidge higher after initially dipping.
As it stands, the Fed remains as data-dependent as ever, and the recent disappointments in U.S. economic data mean the odds of a June rate hike are fading rapidly.