Dollar Extends Gains on FOMC Decision, but Key is BYD

The dollar has been generally firm all day and the FOMC minutes have been seized as a handy reason to extend those gains. The equity market has come off as have US Treasuries. The minutes of the Jan FOMC meeting showed the wide range of opinions at the Fed regarding the pace of long-term asset purchases.

The broad range of opinions may make it difficult to ascertain the signal. That there is a range of opinion, however, is hardly a surprise. The key, in our view, is that the leadership at the Fed, what we call the real Troika of Bernanke, Yellen and Dudley remain in charge of policy and they are dovish.

Several members wanted to be prepared to alter the pace of asset purchases. This seemed to be asymmetrically biased to slowing down the purchases rather than increasing the purchases as if the labor market suffers fresh deterioration in the wake of say the payroll tax hike or the sequester. A number thought the tapering off the asset purchases may be necessary before "substantial improvement" is seen in the labor market. Others warned about exiting QE too early.

A key take away is that the Fed's views about the exit strategy are still evolving and it is a mistake to read into the Jan minutes a clarity or decisiveness. Next month's FOMC minutes will be more important as the Fed will evaluate the impact of the long-term asset purchases.

The Federal Reserve is different than the Bank of England, which as we learned today Governor King was outvoted for the fourth time in his tenure. Bernanke has not been outvoted. To the extent there is hawkish members at the Fed it comes from some of the regional presidents, whose influence is diluted by the rotating basis of their representation at the FOMC.