FOREX TRADING

The minutes of the April 27-28 FOMC meeting provided the details of the discussions on the economic outlook and prospective changes to policy. In all, the minutes highlight that the Fed is more optimistic about the economy with participants expecting that the recovery will continue. Importantly, members indicated that they were seeing signs that growth was being supported by improving domestic demand and “not just fiscal stimulus and a slower pace of inventory decumulation.” This sentiment was reflected in the updates to the Fed’s central tendency forecast with the range for growth in 2010 boosted to 3.2-3.7% from 2.8-3.5% in January.

The forecast update also included a mild downward revision to the range for the unemployment rate (9.1-9.5%) this year. In 2011 and 2012, the unemployment rate is expected to trend lower with the 2012 range at 6.6-7.5% as in the January report. Inflation forecasts were trimmed back with the headline PCE rate forecasted at 1.2-1.5% and the core PCE deflator expected to be in a 0.9-1.2% range in 2010. While there were tweaks to the forecasts, the story on the outlook remained generally intact. The risks to the inflation outlook were considered mixed.

One of the more interesting details in the minutes was the comment by Fed President Hoenig, who disputed the inclusion of the extended period language for the third consecutive meeting. Expressing the “expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” according to Mr. Hoenig, “because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability while limiting the Committee’s flexibility to begin raising rates modestly.” Mr. Hoenig indicated that he believed the target should be raised “toward 1% this summer, and that the Committee could then pause to further assess the economic outlook.”

The minutes flesh out the discussion about asset sales and run through various iterations but conclude that “no decisions about the Committee’s longer-run strategy for asset sales and redemptions were made at this meeting.” The upgrade to the growth forecast combined with a benign inflation outlook and expectations that the unemployment rate will remain elevated suggest that policymakers believe that there is time before the very stimulative level of monetary policy will result in an upswing in inflation. Certainly, today’s CPI inflation data showed that price pressures are muted. As such, the minutes support our view that the Fed will stay on the sidelines and only begin its rate hiking process in late 2010 when there is evidence that the recovery is firm enough to produce a sustained narrowing in the output gap and exert downward pressure on the unemployment rate.