Here's What To Watch For In Today's Fed Minutes Release
The meeting was Janet Yellen's first as chairwoman of the Fed. The big market-moving developments that caused U.S. Treasuries to sell off and interest rates to head higher were the shift toward more qualitative guidance on the conditions necessary to bring about rate hikes in the FOMC's policy statement (the previous 6.5% unemployment rate threshold was dropped) and the updated Staff Economic Projections, which showed that the median FOMC voter's view on the timing of the first rate hike was pulled forward earlier into 2015 than where it stood in December.
5-year U.S. Treasury yields are trading today at 1.69%, about 15 basis points above where they were before the meeting, while 30-year yields are about 6 basis points lower at 3.55%, reflective of reduced long-term inflation and growth expectations brought about by the prospect of the Fed moving to normalize monetary policy sooner rather than later.
"Most investors and analysts expect a dovish patina in today's minutes release and more detail from participants on why they expect the pace of tightening to be more gradual than in the past," says Bill O'Donnell, head of U.S. Treasury strategy at RBS Securities.
"There should also be some market focus on why some of the rates forecasts in the Fed's dot chart drifted higher when inflation readings remain well below their target rate."
However, as Ethan Harris, a global economist at BofA Merrill Lynch, points out in a note to clients, the bond market has sold off on 18 of the last 20 days in which FOMC minutes were released.
"The minutes provide a platform for the hawks to protest against the current policy," says Harris.
"The minutes are now one of our least favorite releases because of the scramble to find the market-moving sentence."
For example, according to the minutes of the January meeting, "A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon."
However, many expect a relatively muted market response to today's release.
"Investors blew off pretty strong JOLTS and small business confidence releases [on Tuesday] and will probably not respond to anything less than full-handed hawkishness," says Steven Englander, global head of G10 FX strategy at Citi.
"10-year Treasury yields are almost back to where they were on the eve of FOMC (helped by the S&P 500 being 20 points lower), but 2-year and 5-year yields remain 5 basis points and 12 basis points higher, respectively, so there has not been a complete dissipation of the hawkish takeaway. Hence the bar for a big upward move in rates, with knock-on effects to FX, is pretty high."