Comment | What the US Fed minutes mean for the markets

It’s a positive for emerging markets that they are now looking to conditions outside the US in arriving at a conclusion over the US policy rate.

What could test their ‘patience’? Some participants said inflation would have to rise, but others said, ‘if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.’

That suggests not everybody is on board the U-turn bandwagon.

The key, however, is how long the current uncertainty continues. The minutes say, ‘Many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as “patient” and might then use different statement language.’

For instance, if the US and China reach a trade deal, that could change in the Fed’s outlook.

The other key takeaway is that the Fed’s balance sheet reduction programme will be halted this year. The minutes say, ‘Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.’ This is key for emerging markets, because, as former RBI governor Urjit Patel had highlighted that the drying up of dollar liquidity was having a deleterious effect on fund flows to emerging markets.

The third and perhaps the most important takeaway is the amount of time the committee spent on the market reaction to the Fed’s policy statements. Members were worried that the Fed statements had led to much volatility in the markets. They were concerned that ‘investors may have taken some signal about the future path of the federal funds rate based on perceptions that the Federal Reserve was unwilling to adjust the pace of balance sheet runoff in light of economic and financial developments.’

Markets have already run up in the aftermath of the Fed’s U-turn to a dovish policy---the MSCI Emerging Markets index, for instance, is already up 8.5 percent year to date. The halting of the Fed’s balance sheet reduction programme will be viewed positively. True, there may be a few jitters about the minutes being less dovish than expected.

But far more important is that the amount of time spent on market reaction at the Fed meeting strengthens the belief that the US central banks will do nothing so old-fashioned as to take the punch-bowl away when the party is in full swing.