January’s FOMC Minutes

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By: Kent Engelke | Capitol Securities

The January FOMC Minutes stated that there is “substantial underlying economic momentum,” but indicated the Committee is in no hurry to accelerate the pace tightening. The Minutes indicated the possibility “economic growth would exceed their estimates,” they also cautioned that there were risks that inflation could “undershoot targets.”

Markets initially advanced on the Minutes, but upon further reflection Treasuries sold off. The 30-year is now at yields last experienced in July, 2015 and the 10-year is trading at over 4 year highs. Equities advanced handsomely on the data, but only to end moderately lower as Treasury yields rose.

One part of the Minutes that I found significant is that Committee Members now think the impact of the recent tax cuts could be bigger than previously believed. Moreover, the January meeting was held before the recent congressional agreement that increased both military and nonmilitary discretionary spending.

In other words, I think the mix of fiscal stimulus — both privately and by the government — could be significantly bigger over the next 18 months than assumed at last month’s Fed meeting.

Next week the FRB Chair will present before Congress the Fed’s semiannual forecast. I think this testimony could be of great significance.

For what it is worth department, according to Bloomberg, the markets still have not discounted three interest rate hikes for 2018, much less four and is only pricing in 1.5 hikes for 2019, still half of what the Fed is forecasting.

What will happen today?

Last night, the foreign markets were down. London was down 0.84%, Paris was down 0.25% and Frankfurt was down 0.61%. China was up 1.89%, Japan was down 1.07% and Hang Sang was down 1.48%.

The Dow should open choppy. The 10-year is up 6/32 to yield 2.94%.

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