Yesterday, the Federal Reserve confused the markets with an unexpectedly hawkish tone in the minutes of its December FOMC meeting.
Here’s a recap of the statement and market reaction from UBS:
“A few members” see asset purchases “until about the end of 2013”, and “several others” would “slow or stop purchases well before the end of 2014”. “A few” specified no time frame. This guidance on the date that purchases might end was a bit odd in that the FOMC just moved away from giving guidance on timing relative to the funds rate. It also appeared to surprise financial markets as 10-year Treasury yields jumped 7bps to 1.91%.
UBS continues to believe that the unemployment rate and inflation rate targets introduced in the December meeting will continue to serve as guideposts to monetary policy.
However, they also note another factor in determining the direction of policy: “the composition of the FOMC, which becomes quite a bit more dovish at the upcoming meeting (please see table on following page).”
As the economists note below, the Fed members who suggested an early end to QE last year may be getting replaced by more dovish members this year.