SocGen FOMC Minutes Preview by Milan Cutkovic

Here is the FOMC preview from Societe Generale:

FOMC minutes: With exit principles agreed, focus turns to rate guidance

The 16-17 September FOMC meeting produced a final draft of the Fed’s Policy Normalization Principles and Plans, a project that undoubtedly absorbed significant time and energy during the last few meetings. With this undertaking wrapped up, the FOMC can now move on to the next pressing issue which is the guidance on rates. The statement – in its current form – promises a “considerable” time between the end of asset purchases and the liftoff in rates. The minutes of the July meeting already revealed some discomfort with this language on the FOMC and a number of Fed officials have since expressed preference for a more data contingent commitment.

With the asset purchase program scheduled to end in October, we believe that the FOMC debated the fate of the language at the last meeting. We hope to gain some further color from the text of the minutes. Our assumption is that the language will be revised at the October meeting and that the Fed will try to downplay the move by stating that it does not represent a shift in policy intentions. This would be similar to the disclaimer inserted into the March statement when the Fed abandoned the 6.5% unemployment threshold.

The second theme that will be of particular interest is the gap between FOMC rate forecasts and market-implied rates. This topic received significant airplay in the week prior to the meeting and the gap widened further after the meeting as the Fed’s median projection drifted higher still. As a result, Yellen had to downplay the dots once again during the press conference, stating that it is not all that clear that a gap actually exists. We assume that the issue was discussed during the meeting and that many participants were less sanguine on it than the Chair.

Overall, we expect the tone of the minutes to be biased to the hawkish side, consistent with the movement of the dots.

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