Former Fed vice chairman Don Kohn identifies the 'major surprise' from the Fed Minutes

On Wednesday, the Fed released the Minutes from its March FOMC meeting.

The Minutes showed that overall, there is a pretty big split within the Fed on when to begin raising interest rates.

But former Fed vice chairman Don Kohn thinks the Minutes held a “major surprise”: The Minutes emphasised the strong US dollar and tumbling energy prices.

In a note to clients on Thursday, Greg Valliere at Potomac Research noted that Kohn highlighted the emphasis on the dollar and energy prices in an email, with Kohn writing that “there seems to be less looking through the dollar/energy price effects than I had anticipated.”

On Wednesday, we highlighted the following section from the Minutes, showing how the dollar and energy prices are weighing on the economic outlook for certain members of the FOMC:

Further improvement in the labour market, a stabilisation of energy prices, and a levelling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up. Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.

In her latest press conference following the Fed’s March policy statement, Fed chair Janet Yellen said that the impact oil prices and the strong US dollar are having on inflation is likely to be “transitory.” This is another way of saying that Yellen is discounting the current impacts these factors are having on inflation.

But Kohn’s reading on the Minutes shows that not all FOMC members are swayed by Yellen’s line of thinking, and some are voicing an opinion that the Fed ought to hold back on rate hikes as a result.

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