FOMC Minutes Highlight Concerns

Alongside fears that inflation will not rebound substantially enough to justify further interest rate hikes in the coming quarters was the notion that the strength of the US dollar would hinder positive economic momentum and keep inflation subdued.  Robust job creation might be a source of upward pressure on inflation, policymakers are wary of the global disinflationary environment, especially amid the substantial losses in energy prices.  While the meeting minutes highlighted that the December decision was indeed a close call, right now, Fed Funds futures are currently pointing to a 45.00% probability of another rate hike in March.  Nevertheless, uncertainty surrounding inflation continues to be a sticking point for policymakers as they intend to normalize monetary policy.  The US dollar continues to post gains against most major peers, gaining substantially versus the Canadian dollar on the back of losses in oil prices.

Despite inventories falling by a substantial amount in the latest Department of Energy report, crude oil prices continued to fall overnight, with Brent and West Texas Intermediate both hitting fresh multi-year lows.  According to the Energy Information Administration, US crude oil stockpiles fell by 5.085 million barrels last week in a sign that year end drawdowns were substantial ahead of the month of January which traditionally sees inventories grow.  However, despite falling inventories, stockpiles at Cushing rose for the ninth straight week while production also climbed by 20,000 barrels per day.  Despite lower prices, output remains resilient and moreover, the drawdown in inventories failed to catalyze even a modest rebound in crude oil prices.  High refinery utilization rates might be partly behind the sustained drop in prices with distillate and gasoline inventories soaring in the last reporting period, evidence of weaker demand.