January FOMC Minutes Not As Dovish As Portrayed

The January FOMC Meeting Minutes are not as dovish as some commentators have portrayed from the increased level of uncertainty highlighted in the Minutes.  A close reading shows that this increased uncertainty did not notably change the medium- term outlook held by Fed officials or staff.   Interestingly, the Minutes show a new emphasis on upcoming CPI releases as important inputs into the Fed's decision whether to hike -- at least for a couple of members.

1.  Although both the FOMC participants agreed that the recent financial market turmoil had raised the level of uncertainty surrounding the US economic outlook, it was not enough to alter their medium-term economic outlook.

    a.  "While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what they might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook."

     b.  "... if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks."   Note that at this point the recent tightening has not been sustained.

2.  Fed staff did not significantly change their medium-term GDP forecast as a result of the financial market turmoil.

     a.  The staff estimated "that the negative effects of a lower projected path of equity prices and a higher assumed trajectory for the foreign exchange value of the dollar would be mostly offset by the positive effects of a lower path for crude oil prices and slightly more stimulus to aggregate demand from changes in fiscal policy."

3.  The actual weakness in Q415 Real GDP Growth was attributed to the drop in inventory investment and weather.  And, much of the weakness was expected to be reverse in Q116 -- which, in fact, is what the Atlanta Fed's GDP Now Model is projecting.

4.  Fed officials acknowledged that manufacturing activity was being hurt by the dollar's appreciation, weak economic growth abroad and declining oil prices.   Surveys pointed to a continuation of this sector's weakness into January, but a few District Presidents said manufacturers in their Districts were still optimistic about the outlook for 2016.

      a.  It does not look like Fed staff or officials were expecting the bounce in manufacturing output seen in today's January Industrial Production Report.

5.  The January and February CPI Reports -- due February 19 and March 16 --  could be important inputs into the March FOMC decision.

      a.  "A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming."

       b.  This strikes me as being a new emphasis by Fed officials.