The minutes didn’t contain anything to meaningfully change our views.
We said after CPI (and Bullard’s market-moving remarks) that it’s a close call between whether March liftoff will be 25 basis points or 50 basis points, but we think the former is still more likely.
There was nothing in the minutes to suggest that they were contemplating a 50-basis-point hike in March. That’s consistent with our belief that policymakers have been operating under the assumption that it would be a 25-basis-point hike. However, that still doesn’t rule out a 50-basis-point hike in March. Speculation about the possibility of a 50-basis-point hike only surged following January CPI and some policymaker comments, which came out after the FOMC meeting. Had the market been pricing such a high probability of a 50-basis-point March hike at the time of the January meeting, they would have discussed it, and that would have shown up in the minutes. So the question remains as to whether the FOMC will opt to follow the market by doing 50 basis points.
At the January meeting, the staff and policymakers looked at what had transpired since their December pivot, and they were quite pleased with how financial conditions had responded as the outlook and their communications evolved. In particular, financial conditions had been quite responsive to changing market expectations of future policy: “Many participants noted the influence on financial conditions of the Committee’s recent communications and viewed these communications as helpful in shifting private-sector expectations regarding the policy outlook into better alignment with the Committee’s assessment of appropriate policy.” For example, the NY Fed Markets Group told the FOMC that longer-term yields were affected by “changing views” on the likely policy path. They pointed out that MBS spreads widened specifically because the Fed was expected to let MBS run off earlier and faster. All of these dynamics surely reinforced their belief that they could stick to 25-basis-point hikes.
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