With the dust settling on the December FOMC Minutes, the one recurring theme, even though he wasn't explicitly named, was Donald Trump and specifically the still "uncertain" impact his fiscal policies will have on the economy.
As a result, almost all Fed members saw increased upside risks to their growth forecasts stemming from what are likely to be expansionary fiscal policies under the Trump administration, with half explicitly including fiscal policy in their forecast. Furthermore, Fed staffers also noted the impact of Trump's impact already taking place in capital markets.
Continuing the Trump theme, in its review of U.S. economic situation, Fed staffers said fiscal policy under Trump was seen as largely driving asset price changes in the future, as well as expectations for path of Fed policy. The minutes hinted that much of the steepening in the expected path of Fed policy reflected in part investors’ perceptions that incoming Congress and Trump administration would enact significant fiscal stimulus measures
Aside from Trump, FOMC members debated trends in inflation with a few noting that certain measures suggested risks to inflation outlook had become more balanced; while others pointed out that market-based measures of inflation compensation were still low or that downside risks remained. Meanwhile, many said that risk of “sizable” undershooting of long-run normal unemployment rate had “increased somewhat,” and FOMC might need to raise fed funds more quickly than expected to stem potential buildup of inflation.
And since Trump was the unspoken message, it stems to reason that the Fed, unaccustomed to leaving policy matters in others' hands was especially "uncertain", and as Pantheon Macroeconomics economist Ian Shepherdson writes, “until the extent, structure and timing of fiscal easing is known, the Fed’s forecasts for both the economy and rates have to be considered tentative."
Which is surprising because while the Fed is clearly concerned about what is coming, US equity markets, having soared since the election, are quite confident that no matter what Trump will deliver inflation.
Shepherdson remains unconvinced and notes that "while half of FOMC incorporated expectations of fiscal easing into forecasts, there are no details of what exactly they anticipate." He also highlights that the Fed’s idea of “gradual pace” of tightening is open to interpretation and significant fiscal easing “could change things quickly.”
He concludes that Pantheon maintains expectations for next Fed rate increase in March “assuming decent Q1 growth data - especially payrolls - and assuming the fiscal package is known, and is quite large.”
Another economist, BMO’s Ian Lyngen interprets the Minutes from a slightly different angle, and notes that the Minutes are actually less hawkish, despite the strong kneejerk reaction in the dollar.
He writes that the Minutes show discussion on the downside risks stemming from a stronger USD, hinting of potentially slower growth abroad.
He also points out that the initial price action was bullish in USTs, signaling view that minutes were walking back initial hawkish read from FOMC statement, although the subsequent move appears to have undone the kneejerk reaction.
He concludes that “while the observation was offered that ’improved confidence could boost investment,’” the minutes continue “to say that ’many officials stressed uncertainty on fiscal policy effects’”
Mizho's Steven Ricchiuto had a more upbeat reac, and said that "although the FOMC suggested there was upside risk due to fiscal policy, the fact that about half of the members of the committee has discounted some stimulus from Trump seems to have been greeted positively."
The strategist admits that heading into the minutes, he had expected the market to sell on a more hawkish tone, "but that failed to materialize. Markets have generally been tracking sideways for weeks." He concludes by expecting the long end to sell off heading into Payrolls Friday.
Finally, Lindsey Group's Peter Boockvar cut right down to the chase, saying “bottom line, we are dealing with a still dovish committee that even with a different voting complexion, will remain so in 2017."
Seemingly peeved by the Fed's touble talk, Boockvar said "we got a little bit of this, a little bit of that with the end result being “the actual path of the fed funds rate would depend on the economic outlook as informed by incoming data.” Sound familiar?"
He concludes by noting that the market is priced fully for 2 hikes this year "which continues to express the belief of how much they will continue to drag their feet in raising rates.”