To us, the message conveyed in the FOMC minutes for the December meeting was somehow different from those at the post-meeting press conference. From the post-meeting statement and Chair Jerome Powell’s speech, we judged that the Fed turned a bit more cautious over the economic and financial market outlooks. However, the minutes have sent a more dovish message. This obviously has caught the market in surprise, evidenced in the selloff in US dollar and the steepening in the yield curve. US Treasury yields were lower across two years to 10 years bonds. Meanwhile, the spread between 10- year and 2-year Treasury yields widened to  0.153% from 0.129% a day ago, suggesting short-term yields have fallen more significantly after the release of the minutes.

The key word in the minutes is “patience”. As noted in the minutes, “many participants” preferred to be “patient about further policy firming”, amidst “muted inflation pressures”. Recall that the Fed voted unanimously to increase the policy rate, by +25 bps, to 2.25-2.5%. The minutes showed “a few participants” preferred no change given the concerns over financial-market volatility and risks to the outlook. On the monetary policy path, “participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier”.

The desire to stay patient is closely linked to the inflation development. As noted in the minutes, “several” members noted that “the longer-term TIPS-based inflation compensation had declined notably since November, concurrent with both falling oil prices and a deterioration in investor risk sentiment”, while “a few” others suggested that “the decline in longer-term inflation compensation as an indication that longer-run inflation expectations may have edged lower”. There were “several” members “cited survey-based measures as suggesting that longer-run expectations likely remained anchored”. We are surprised that the Fed did not draw attention to this issue in the accompanying statement.

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The amendment in forward guidance was mild in the statement. The FOMC retained the view that “further gradual increases” in the Fed funds would be required to achieve the dual mandates. While the word “some” was added before “further gradual increases” at the December reference, the Committee did not elaborate on the meaning of “some”. The members judged that “risks to the economic outlook are roughly balanced”, adding the pledge that they would “continue to monitor global economic and financial developments and assess their implications for the economic outlook”. From the minutes, we realize that, communication via forward guidance might be reduced (or replaced) in the future. At suggested in the minutes, “participants discussed ideas for effectively communicating to the public the Committee’s data-dependent approach, including options for transitioning away from forward guidance language in future post-meeting statements”. “Several” members believed that “it might be appropriate over upcoming meetings to remove forward guidance entirely and replace it with language emphasizing the data-dependent nature of policy decisions”.

The minutes revealed that the central bank is more concerned about the outlook of the economy and the financial markets, that what was suggested in the statement and the downgrades of economic projections.

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