Summary of October FOMC Meeting Minutes & Potential Timing of First Rate Hike

Summary of October FOMC Meeting Minutes & Potential Timing of First Rate Hike The USD has strengthened since the release of the Fed meeting minutes. Key bullets from Oct. FOMC minutes: FOMC expects QE taper in coming months based on labor market improvement Participants assessment of the costs/benefits of QE may see FOMC alter balance between policy tools, while still maintaining significant accommodation Participants had reservations about adjusting pace of QE based single rule... Unemployment rate or payroll number Some participants preferred to adopt a simple plan, such as a timeline or announce total size of remaining QE Simpler plan could help public distinguish Fed policy on asset purchases from fed funds rate
 


Number of participants want similar adjustments to treasuries & MBS's, while others preferred trimming treasuries more rapidly FOMC says it may be appropriate to simultaneously reduce pace of purchases & modify forward rate guidance Couple of participants favored reducing 6.5% unemployment rate threshold, others expressed concerns Several participants think providing qualitative information is most helpful after unemployment threshold reached In hindsight, key Fed proclamations over the past 24-hours are more meaningful: Yellen: Monetary policy likely to remain highly accommodative long after thresholds reached Evans: Fed probably will purchase $1.5T in assets from Jan.

2013 until QE is wound down Bernanke: Interest rates to remain low until "well after" 6.5% unemployment threshold reached As a result, while the door for Tapering QE in December is still open, we believe it will not occur until early 2014. Furthermore, when they do begin to scale back the pace of monthly asset purchases, it will likely be in conjunction with a strengthening of the Fed's forward rate guidance. As a result, rather than bringing forward the potential timing of the Fed's first rate hike, this practice would probably extend it further into the future. Interestingly, this is already being exhibited by the 30-day Fed Fund futures curve.

 Two months ago, pre-Sept. FOMC announcement, the market was priced to see the first rate hike (to 0.50%) in March 2015, however as of today (post-Oct. meeting minutes) the curve has not only flattened, but has also shifted materially to the right. Accordingly, the market now believes the timing of the first Fed rate hike is Nov/December 2015!