FOMC January minutes show optimistic review of economic data

The January FOMC minutes show that the committee has kept a positive review of incoming economic data amidst increasing worries regarding the impacts of financial market disruptions. The minutes set up three thresholds for the next policy hike: the data should rebound in relative to the fourth quarter, stability in financial markets and increased confidence amongst the committee regarding the balance of risks.

Even though the economy seems to be on the path to meet the criteria, the likelihood of a rate rise in March is low as the committee is possibly still reviewing the implications of the already prolonged period of elevated volatility. The Fed is expected to hike rates twice in 2016, one in June and one in December.

The Dallas Federal Reserve President Kaplan and Vice Chairman Fischer are expected to have slightly more hawkish views. Meanwhile, San Francisco Federal Reserve President Williams is likely to continue with his positive views regarding the economic outlook, but is worried regarding the impacts of recent market volatility.

According to the minutes, the committee looks unusually unsure regarding the balance of risks. It noted that it is keeping a close watch on global financial and economic developments and is reviewing their implications for inflation, the labor market and for the balance of risks to the outlook. Most of the failure to assess risks properly came due to sharp fall in financial market scenario in weeks prior to the meeting. The minutes reveal a general agreement that if those conditions continue, the impact will be somewhat similar to that from further firming in monetary policy. This statement suggests that the committee expects to keep policy unchanged until there is an improvement in financial conditions.

Several participants indicated that due to the unsettled nature of financial markets and the global outlook, they could not judge risks easily. Most participants thought that the there is no sufficient proof to suggest whether the balance of risks to the medium-term outlook has changed materially.

Meanwhile, the committee members look positive regarding the near-term economic outlook. Their confidence is mainly based on the recent strength of labor markets. According to certain participants, labor market indicators were inclined to give a more reliable early reading on the economy's underlying strength, as compared to other measures of activity, including the preliminary data of Q4 GDP. The participants saw the slowdown of consumption in Q4 as transitory and project it to rebound in Q1. Moreover, the minutes noted worries regarding the production slowdown during the end of Q4.

On the inflation front, many participants project it to return to the target rate of 2% over the medium term after energy prices and non-energy imports stabilise. However, according to several participants, the inflation outlook is uncertain and they see risks towards the downside. According to the board staff, the import prices will steadily start to increase later in 2016. The participants indicated that certain market-based measures of longer-term inflation compensation fell to record low levels, raising concerns if inflation expectations are moving lower.