FOMC Minutes Preview: Beware A Dovish Surprise By A “Very Uncertain” Yellen

The minutes for the FOMC’s Oct/Nov meeting will be released at 2 pm today, and are expected to be uneventful, just like the Fed meeting during which the central bank held rates between 1.00% and 1.25% in a unanimous vote, as expected, and where the only notable tweak was the small upgrade in the language used to describe the US economy, which is now seen to be expanding at a “solid rate” (versus “rising moderately” before), despite the disruptions caused by the recent hurricanes. This implicit upgrade prompted the market and economists to assign a virtual certainty to a December rate hike; indeed according to the CME’s FedWatch, the odds of a December rate hike are 100%.

“In recent weeks,” HSBC says, “many Fed policymakers have said that they are watching inflation closely. Even so, a number of these officials have expressed the view that they would likely be willing to support a rate hike in December.”

Still, after yesterday’s Q&A by Janet Yellen at NYU Stern, doubts have emerged, and nowhere more so than with Rafiki Capital’s Steven Englander, who cautions that today’s Minutes “are likely to point to less confidence on an inflation pickup than three hikes in the dots suggest.” He references Yellen’s comments yesterday, which “suggest that she has less confidence in the three hikes that she very likely put into her 2018 dot plot.” 

Consider Yellen’s comments yesterday indicating that she is ‘very uncertain’ about the inflation path over the next year: “My colleagues and I are very uncertain that it [weak inflation] is transitory.” If you read Evans’ and Brainard’s comments they look close to a dissent on the December hike (along with Kashkari).

By contrast, the market has been pricing in more and more 2018 hiking risk. The maroon line in the chart below shows the increase in hiking expectations in recent weeks, with investors pricing in more than 1 1/2 hikes for the first time since April.”