FOMC minutes preview: Staler than Grandma’s cereal?

In a bit of an off week for top-tier US economic data, traders are likely to focus intently on the release of tomorrow’s FOMC minutes.

The extreme market volatility we’ve seen so far in 2016 has had a dramatic impact on traders’ expectations Federal Reserve policy, but the full extent of the damage wasn’t necessarily clear when the Fed last met in late January. Recall that the central bank chose to leave monetary policy completely unchanged at that meeting, and the accompanying statement came off as generally neutral for policy moving forward, noting that the committee was "closely monitoring" global economic and financial developments and that the economy would only warrant "gradual" rate increases.

For what it’s worth though, that period appears to have coincided with the "eye" of the proverbial market volatility "storm;" since then, oil has seen a 25% intraday-peak-to-trough collapse down to a 12-year low near 26.00, equities have rolled over to retest, or in some cases break, the mid-January lows, and the US dollar has shed about 3% of its value. In other words, the market environment is even more concerning now, and even if the Fed minutes come off as relatively sanguine, traders will still have lingering questions about whether the latest bout of global market volatility may have shifted some of the voters more to the dovish side of the table.

The other reason that the market may view tomorrow’s Fed meeting minutes as stale is that we just heard, at great length and in minute detail, everything there is to know about Fed Chair Janet Yellen’s views on the economy in last week’s Humphrey-Hawkins testimony to Congress. While Yellen still struck a relatively optimistic tone on the real economy, she did express additional concerns with developments in global markets. Therefore, tomorrow’s minutes from the FOMC meeting that took place three weeks ago is unlikely to move the needle more than last week’s testimony.

With all those caveats out of the way, there will still be some key topics to hone in on. Specifically, traders will be keen to see how many voters were apprehensive about raising interest rates too quickly (i.e. starting in March), as well as how the committee views the amount of "slack" in the labor market. If some voters were already concerned with the economy approaching full capacity, this month’s jobs report, which showed relatively few jobs created but relatively high wage growth, could be a sign that the labor market may finally engender some durable inflationary pressures. Finally, any comments about falling inflation expectations could be interesting, given the ongoing drop in market-based forward inflation measures of late.

Overall, we don’t expect tomorrow’s FOMC minutes to be as big of a market mover as usual, but traders of all stripes should still tune in to see what the world’s most powerful central bank is (was) thinking.

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