Currency corner: Predicting US Fed stance not easy proposition

It would be hard to put the Federal Open Market Committee (FOMC) minutes released Wednesday night under the hawkish or dovish category. The markets traded within a very narrow range post the release of the minutes, making it quite a non-event.

The dollar, however, finished higher against all major currencies except the pound, which meant that the currency market is factoring in a September rate hike.

Here are the main takeaways from the FOMC minutes:

No June hike

The key lines from the FOMC minutes with regard to the timing of upcoming Fed rate hike: "A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to" justify tightening. "Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility."

Now, the question is whether the liftoff is in September or December. The markets is pricing a September rate hike but going by the poor prints in all leading indicators of economic activity - retail sales, consumer sentiment, manufacturing growth and tepid wage growth, this column still thinks that Fed chief Janet Yellen will only tighten in 2016.

Growth will resume but only moderately

Most FOMC members "continued to see the risks to the outlook for economic growth and the labor market as nearly balanced." Economic data releases over the next month will tell us whether the sharp slowdown in the first quarter were due to seasonal disruptions as the severe winter took its toll on the economy and the disputes on the west coast ports led to a major slowdown in shipping.

The minutes further added: "Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further."

Fed is worried about market volatility

The 1994 bond market turmoil and the taper tantrum of 2013 are fresh in the FedÂ’s mind and they will do all they can to smooth out market volatility. The key point here is that one can safely assume that even if they press the monetary tightening button in September, they will be watching the market price action very closely and will only hike at gradual Fed meetings if there is no evidence of a sharp bond market sell off.

The FOMC indicated some concern about Treasury yield volatility once tightening commences. "It was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds."