US FOMC Meeting Minutes – May 16, 2012 – Forex Strategy

The entire financial world will be paying attention to the meeting minutes from the last FOMC meeting where the Federal Reserve decided to keep rates unchanged with no new stimuli announced. Here’s a quick breakdown of last FOMC statement and what was changed, click here to read the entire POST FOMC Analysis,

The FOMC Statement:

Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

Previous Statement Reads:

1. “the unemployment rate has declined notably…” 
2. “Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately.”

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

Previous Statement Reads:

1. There was no expectation of “then to pick up gradually”
2. “Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook”.

These last 3 paragraphs remained unchanged… Therefore, the main changes in the first paragraph are related to slight downgrade of the recent Employment Change, and that inflation is on the rise, primarily because of higher crude prices.

In the next paragraph, the words “…then to pick up gradually” was added to reflect the Fed’s positive view of the economy. Although still cautious in global economic conditions (such as in Europe), I believe the Fed is overall positive… Here’s a quick summary:

1. Employment is still a problem…
2. Inflation is due to high crude prices…
3. Economy will pick up towards the end of the year…
4. Europe is still a concern.

If you combine the post analysis of the FOMC Statement and the Q&A session during the press conference, you’ll see a picture start to emerge, and that’s NO MORE QE by the Feds.  As a matter of fact, here are some recent comments from Fed Officials after the meeting:

• (US) Fed’s Fisher: Higher inflation rate as advocated by economist Paul Krugman would only see corporate sector pull back on investment – CNBC- There is a ton of liquidity on the sidelines.- Economy in Dallas area is not as robust as expected.- Would not support additional easing; Recent steps have not been effective. (Fisher is not a voting member of FOMC)
• (US) Fed’s Lacker: Additional stimulus will not lower the unemployment rate; rate is reflective of a shortage in skilled labor. (Lacker is a voting member of FOMC)
• (US) Fed’s Lockhart: Federal Reserve is unlikely to return its balance sheet to the levels seen pre-crisis; confident in the Fed’s ability to drain balance sheet when the time comes- Have not ruled out any options, including QE3. (Lockhart is a voting member)
• (US) Fed’s Plosser: Prospects for labor markets will likely improve; near term inflation to remain at moderate levels- Easy monetary policy still required, but it could be possible to scale back degree of accomodation much before the end of 2014. (Plosser is not a voting member of FOMC)
• (US) US Fed’s Williams: Very concerned about the debt situation in Europe, worst not yet over – The US economy has recently improved.- Reiterates no reason for new monetary policy measures at the moment, response may be needed if unemployment does not improve. (Williams is a voting member of FOMC)