Date: 21 Feb 2018

In December, when the Fed hiked rates, its accompanying statement said the Federal Reserve Open Market Committee (FOMC) “continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will remain strong.” In January, when the Fed did not hike rates, its accompanying statement said  the FOMC “expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” Note the slight difference, namely the addition of the word ‘further’ before the word ‘gradual.’ This was clearly deliberate but does it mean anything? Traders may find out on Wednesday at 1900GMT when the Federal Reserve releases the Minutes of that January meeting.

It’s arguable that the inclusion of the word ‘further’ was a hawkish nod in which case, given that US inflation data has in the main surprised on the upside since the January FOMC meeting and given that Fed officials appeared largely unconcerned over recent equity market turbulence, if Wednesday’s minutes do suggest that the Fed did intend to convey a slightly more hawkish tone in that January statement, markets might rationally conclude that there is a material risk that the next FOMC meeting on March 20-21 may not just deliver a rate hike but also an upward revision to their dot plot consistent with 4 hikes in 2018 and not just 3.  With that in mind, traders might wish to keep an eye on Wednesday’s Fed minutes.

Written by Neal Kimberley, External Currency Analyst.