The main message from minutes from the Federal Reserve Open Market Committee (FOMC) meeting from the December 13/14th meeting was the increase in uncertainty injected into forecasts and expectations given potential changes to fiscal policy.
Almost all officials saw upside risks to their growth forecasts on expectations that fiscal policy would be more expansionary under the Trump Administration, although several stated that economic growth might turn out to be faster or slower than they currently anticipated. Around half of the committee incorporated assumptions of greater fiscal stimulus into their forecasts.
Participants emphasised their considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives.
There were upside risks to US economic activity from potentially better performances by overseas economies or an improvement in investment. There were, however, also potential downside risks if the dollar strengthened further.
Many participants saw an increased chance of a faster pace of rate hikes due to the sizeable undershooting of the longer-term unemployment rate, which could lead to higher inflation. In this context, there were also concerns that relatively tight labour markets would lead to a further erosion of remaining slack in the economy.
For some participants, the greater upside risks to economic growth and upward movement in earnings had increased the upside risks to their inflation forecasts. However, several other officials pointed out that further dollar appreciation might hold down inflation and that downside risks to inflation remained.
A few participants commented that readings from financial markets including derivatives, suggested the inflation outlook was more balanced around the 2% target.
Participants all agreed that they should continue to closely monitor inflation indicators and global economic financial developments.
Although several members maintained their dovish inflation outlook, the underlying tone of the minutes suggests that a majority of members suspect that a more hawkish stance will be required during 2017 to stem inflation, especially if fiscal policy is more expansionary. The minutes should limit the scope for a near-term dollar correction weaker.
There is, however, a high degree of uncertainty over the outlook which will contribute to sharp shifts in market sentiment.
The dollar weakened initially after the minutes, but regained ground with EUR/USD at 1.0465 after touching 1.0500. Treasuries also reversed initial gains to stand unchanged on the day while equities held in positive territory.