Information drives markets and none more so than the ruminations of the US Federal Reserve. The prompt release of the minutes of Fed meetings is a welcome increase in transparency. But has investors' knowledge about Fed intentions been advanced by December's minutes?
In broad terms, probably not. In November Alan Greenspan, Fed chairman, bluntly said anyone who had not hedged against rising interest rates was “desirous of losing money”. In mid-December the Fed raised interest rates and signalled further measured increases. But the devil, as always, is in the detail. The minutes' comments on the upside risks to inflation and potentially excessive risk-taking in financial markets lend a hawkish tone.
There is scope for differences of interpretation on the dollar. In November Mr Greenspan said the size of the US current account deficit must eventually diminish foreigners' dollar appetite. The December minutes, in contrast, refer to the need for higher national savings when discussing global imbalances. The dollar is not mentioned, which could imply the Fed sees rates as the main adjustment mechanism. But, in official communications, the Fed restricts itself to interest rates. The Treasury comments on the currency.
Dollar strength after the release of the minutes owed more to a correction of December's sharp decline than a change in Fed stance. To redress US imbalances both higher rates and a weaker dollar are needed and tighter fiscal policy too.