FOMC members on point, or looked through slower growth in Q1? - Nomura

Analysts at Nomura noted the minutes for the 14-15 March FOMC meeting revealed few major surprises and offered a full review.

Key Quotes:

"However, it was a bit surprising that the FOMC participants remained optimistic and maintained a rosy assessment on the economy. Although participants acknowledged incoming data indicating Q1 GDP growth below that of 2016 Q4, they attributed some weakness in personal consumption, in part, to lower energy expenditure induced by unusually warm weather and delayed tax refunds.\

Moreover, policy makers appear to have looked through slower growth in Q1, noting that the possible contribution of residual seasonality to real GDP growth. While the minutes indicated that some participants now expect fiscal stimulus to start no earlier than 2018, the downside risks associated with China and Europe were described as having diminished over recent months. Considering the participants’ more optimistic outlook, it is possible to view that the FOMC is considering additional hikes in coming months if the economy stays on track. However, given continuing wide divergence between survey and spending data as well as various risks including potential policy disappointment, we continue to expect the next policy rate hike to happen in September.

Elsewhere, the committee provided information on which balance sheet items would be affected in the initial adjustment phase, stating that participants “generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS.” This symmetry between Treasury securities and MBS was slightly unexpected, with some market expectation of the preliminary adjustment round affecting primarily MBS. 

Moreover, the minutes referred to the likely timing to start the process to reduce its balance sheet. Specifically, if the economy evolves as the FOMC expects “most participants” think that a change to the reinvestment policy would likely to take place “later this year.” That said, there remain some questions regarding the balance sheet policy. For instance, it is unclear whether a reduction in the balance sheet is a substitute for a rate hike. 

Moreover, given prepayments of MBS, technically it is difficult for the Fed to reduce reinvestments for Treasuries and MBS in exactly the same way. The Committee will likely release further information on the detailed plan for the balance sheet normalization when the timing to cease reinvestment approaches."