FOMC Minutes Talking Points:
- Stance remains appropriate for now
- Coronavirus remains an uncertainty
- Inflation targeting discussed
January’s minutes from the Federal Open Market Committee released today saw little impact to price action across asset groups. However, the US Dollar did gain momentum following the release with USDJPY breaking above 111.456. The cross is nearly 3 percent above its monthly lows after a strong shift up in recent days.
USDJPY (5-Min Chart)
Language regarding repurchase operations, coronavirus effects on the economy, inflation, and balance sheet growth caught investors’ attention. Liquidity conditions have been forefront to market participants since problems arose in the repo markets last year. And, the recent coronavirus outbreak has injected worries over a slowdown in China spilling over into the global economy, should containment efforts fail.
Regarding inflation, January’s minutes concluded achieving the Fed’s dual-mandate would require low policy rates regardless of what tools or strategies currently in place. Also noted, were risks to the financial system arising from long-run low rates, mainly increased borrowing and valuation pressures.
The use of inflation targeting concluded that its implementation at this time could signal a disinterest in achieving the 2 percent inflation target. Other banks, like the Bank of Canada have used inflation targeting for some time, with mixed results, however. The Federal Reserves policy framework review is expected to address the issue in-depth, due out later this year.
Repo Operations and Balance sheet:
Stability in money markets around the end of the year were stable according to the minute’s assessment. The Fed’s balance sheet has increased in recent months after repo markets flashed warning signals last year. Since then, the Fed has increased their level of reserves to calm market conditions and bring the overnight repurchase rate back into balance.
The minutes speculate the level of reserves will come into balance at the end of the 2nd quarter. On the balance sheet, the manager’s assessed that the balance sheet would moderate in the first half of this year as outstanding repos decrease slowly.
The recent outbreak of the coronavirus has injected uncertainty into the economy, especially concerning growth in China. January’s minutes lent concern to the virus outbreak and its potential impact on growth in China and the surrounding region. Civil unrest in Hong Kong did hit economic activity, but the minutes referenced a moderate growth uptick in China to close out 2019. The current stance was seen as appropriate, however.