‘Patiently’ Waiting For The FOMC Minutes

  • Strong employment print for January fuelling expectations of June/September Fed liftoff
  • Expectations about the pace of rate hikes lagging behind FOMC projections
  • Market expectations about inflation both medium & long term have dropped
  • Low oil prices, a rising USD and external deflationary forces seen restraining US inflation.
  • Fed’s Use of term “patient” in January meeting, under scrutiny.

January’s stronger than expected employment report, showing employers added 257,000 jobs has shown the US economy to finally be strengthening with hiring accelerating and wages rising. This increase in job and pay growth have fuelled market expectations that the Fed will begin hiking short-term rates by mid year.


2015-02-18 12_28_28-Yellen labor market dashboard

2015-02-18 12_29_00-Yellen labor market dashboard

Whilst expectations of a rate hike have come in, expectations about the pace of these hikes are still seen to be lagging FOMC projections. By 2017 the gap between fed funds futures and the FOMC median dot is 150bps. 

2015-02-18 12_30_52-fed funds dot - Google Search

A major contributing factor to the difference between FOMC projections and market expectations is the fact that over the last 12 months, market expectations about inflation over the medium and longer term have dropped off considerably and imply that the Fed will not be able to reach its 2% inflation target in the next five to ten years.

Fuelling this market view that the Fed will be unsuccessful in achieving it’s inflation goal is the view that low oil prices, a rising USD and global deflationary forces will restrain US inflation for many years to come.

Another market view however, is that the rise in wage inflation over the past three quarters is in line with the pattern observed in previous expansions and that while the economy overall may be another year or more away from full capacity, wage inflation appears to be on an upward trend and as such the Fed shouldn’t have too much trouble returning to around 2%

At the Fed’s latest policy meeting in January, the Fed said they were “patient” about raising short term interest rates. Traders will be awaiting the release of the minutes today to see whether that phraseology has been dropped or not. If there is seen to be a forceful desire by some on the committee to remove the word patient from the statement then the market will likely interpret that this would see the phraseology absent from the next meeting in March and as such, expectations for a June rate hike would increase.

The CME Group Fed Watch Implied Probability tool currently shows a 23% probability for a June rate hike compared with 64% for September.



So What’s The Trade?…

The most trade-able aspect of this minutes release is going to be the issue of the use of the word “patient”.  Should we see a forceful  desire to remove the word this will likely spur expectations of a rate hike towards the front end of the June/September range and this will be Dollar bullish.

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I think the best vehicle to profit on the FOMC meeting minutes this evening will be the USDJPY. If ‘patient’ is removed I would like to be buyer of the USDJPY targeting a break of 120.40 playing for a retest of the 2014 highs. If the ‘patient’ phrase remains in place i would like to be a seller of the USDJPY targeting 117 initially and then range lows at 116/115. With the reduction in positioning in the JPY as reported in this weeks COT report a move in either direction could run on nicely. So keep the powder dry and be prepared to parse the statement and act decisively!