It may have been rather subtle, but in the wake of the FOCM minutes, the Federal Reserve’s monetary policy could now have been nudged on to a different path. This could mean that there is a significant impact on the dollar and the pace of tightening. Last Friday’s Non-farm Payrolls report shows that US economic data is still key, we look at the impact that recent key factors are having on the outlook for forex, commodities and equities in the coming days.
Recent FOMC minutes revealed a lot more than normal and the implications could be significant and ongoing. The Fed is now starting to discuss winding down its massive $4.5 trillion balance sheet which “most participants” agree will begin “later this year”. According to Fed member Bill Dudley, this could impact on the pace of tightening in 2018. $426bn of Fed held Treasuries that are set to mature in 2018 and whilst the FOMC expects the “reductions need to be gradual and predictable” with a “phasing out of reinvestments”, this could have a dovish impact on monetary policy. The Fed will be concerned that scaling back its reinvestment in Treasuries and Mortgage Backed Securities could unduly tighten policy. New York Fed President Dudley, a habitually dovish voting member on the FOMC, said last week that the Fed could pull back on rate hikes next year as it observes the market reaction to its balance sheet reduction. Reaction to rate hikes and forward guidance (dot plots) is fairly predictable, but reaction to the unprecedented reduction of $4.5 trillion of assets purchases accumulated during the multiple rounds of QE is not entirely predictable. Already expectations of hikes in 2018 are being pared to around two, whilst the Fed dot plots are currently at three. The Fed will need to be clear in its message, with opportunities in the June and September FOMC press conferences, Yellen’s Congressional testimonies and Jackson Hole in August.