Will The FOMC Minutes End Dollar’s Correction?

Corrective forces continue to grip the foreign exchange market.  Many expect the dollar’s downside correction/consolidation to end today.  Technically-inspired short-term participants often see 3-4 day counter-trend moves to be typical of market moves.  Fundamentally-inspired traders expect the FOMC minutes, which will be released in the North American afternoon, to be read by the market participants with a hawkish bias.  

We are sympathetic to a hawkish read of the FOMC minutes, but do not believe that it reflects policy.  Specifically, we argue that the FOMC minutes increase the noise to signal ratio by being comprehensive.  The FOMC minutes, like the dot-plot forecasts makes it seem as if all views are equal.  They are not.  We understand the signal of Fed policy to be generated by three officials:  Yellen, Fischer, and Dudley.  Their main instrument, in addition to their speeches, like Dudley’s yesterday, is the FOMC statement. 

Recall that the FOMC statement contained three key points:  First it characterized the slack in the labor market as significant.  One may want to argue that this has been superseded by the recent jobs report that saw the unemployment rate fall below 6%. However, Dudley repeated that characterization yesterday.  

Second, there is the “considerable” period of time between the end of asset purchases and the need to hike rates. Dudley again indicated that expectations for a rate hike in mid-2015 are “reasonable”. That suggests a rough definition of “considerable period.  

At the end of the FOMC statement there is a third piece of forward guidance.  Even after the inflation and unemployment are consistent with the Fed’s mandates, economic conditions may warrant a lower Fed funds rate than officials would regard as the long-term equilibrium rate. 

At the September FOMC meeting, there were two dissents.  The dissents were not over policy.  It was over words, and specifically, how the forward guidance was provided. Dissenter Fisher from the Dallas Fad was quoted recently indicating he favored a Q1 15 rate hike.  Leaving aside the temporal target rather than macro-economic conditions, the difference between his view and Dudley’s (and we say the Fed’s Troika view) could be as small as a few months. The FOMC meetings in Q1 15 are in late January and mid-March.  The Q2 15 meetings are in April and June.