With Fed Chair Powell having blown his dovish wad yesterday, today's FOMC Minutes (from a hawkish Fed statement) - as dated as they are - seem like a bit of non-event.

The main headline from the minutes is that almost all Fed officials saw another rate-hike "warranted fairly soon." But The Fed discussed modifying language on "Further Gradual" hikes while expressing its greater reliance on incoming data.

On hiking "fairly soon"...

Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.

But being data dependent:

Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook; such a change would help to convey the Committee's flexible approach in responding to changing economic circumstances.

Which means Incoming data is key:

"Participants emphasized that the Committee's approach to setting the stance of policy should be importantly guided by incoming data and their implications for the economic outlook"

As forward guidance may be revised:

Participants also commented on how the Committee's communications in its postmeeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rate.

As Bloomberg notes, the language about removal of "further gradual increases" implies the committee's preference to be as flexible as possible in setting policy. Indeed, the key message in recent Fedspeak and the November minutes is that they will be data-dependent.

Some more on "further gradual" language:

Almost all participants reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the Committee's objectives of maximum employment and price stability.

And counter to the "fairly soon" language

a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases

On the neutral rate and why the market misread Powell's statement: only a "couple" (less than many, less than several, less than a few) participants noted that the federal funds rate might currently be near its neutral level:

A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations. 

Also, those wondering, the Fed was not at all bothered by market vol; is the Powell Put much lower?

"In their discussion of financial developments, participants observed that financial conditions tightened over the intermeeting period, as equity prices declined, longer-term yields and borrowing costs for most sectors increased, and the foreign exchange value of the dollar rose. Despite these developments, a number of participants judged that financial conditions remained accommodative relative to historical norms."

And here is the punchline: monetary policy can change overnight:

"Monetary policy was not on a preset course; if incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change"

Meanwhile, tighter financial conditions were clearly a concern:

Various factors such as the recent tightening in financial conditions, risks in the global outlook, and some signs of slowing in interest-sensitive sectors of the economy on the one hand, and further indicators of tightness in labor markets and possible inflationary pressures, on the other hand, were noted in this context

Even as chances of QE4 are clearly being contemplated:

"Participants also observed that regimes with abundant excess reserves could provide effective control of short-term rates even if large amounts of liquidity needed to be added to address liquidity strains or if large-scale asset purchases needed to be undertaken to provide macroeconomic stimulus in situations where short-term rates are at their effective lower bound"

And lets not forget the high level of debt/leveraged loans:

"Several participants were concerned that the high level of debt in the nonfinancial business sector, and especially the high level of leveraged loans, made the economy more vulnerable to a sharp pullback in credit availability, which could exacerbate the effects of a negative shock on economic activity."

The Fed also discussed potentially tweaking the IOER, perhaps even before the December meeting to keep the fed funds in its corridor range:

While the funds rate seemed to have stabilized recently, there remained some risk that it could continue to drift higher before the Committee's next meeting. As a contingency plan, participants agreed that it would be appropriate for the Board to implement such a technical adjustment in the IOER rate before the December meeting if necessary to keep the federal funds rate well within the target range established by the FOMC.

Putting it all together, Bloomberg economist Tim Mahedy writes that Powell's comments yesterday may have been a nod to the discussion around the need for flexibility in the rate path.

So far, a strong labor market has been the guiding light for policy, but inflation is likely to play a bigger role in 2019. Core PCE in this morning's report was softer than expected, and recent research by Adam Shapiro at the San Francisco Fed argues that inflationary pressures this year can be traced to acyclical inflation -- components not sensitive to economic conditions -- and thus inflation could be lower than the headline data series depict. Both of these factors could make the Fed more dovish next year. Still, inflation lags growth, and capacity constraints along with continued above-trend growth point to firming pressures next year.'

Meanwhile, as Mayank Seksaria, strategist at Macro Risk Advisors, points out the obvious: "If the Fed doesn't downshift the dots for 2019, that will be hawkish in December."

That said, the market has already given up on The Fed's forecasts...

 

And expectations in the markets are now for less than one 25bps rate-hike next year...

 

Furthermore, it is worth noting that the US macro surprise index is at its weakest in over a year

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