2017/08/17 Commentary: FOMC Minutes Minuet
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Commentary: Thursday, August 17, 2017
FOMC Minutes Minuet
And then in the face of inferential dread of Wednesday’s July 25-26 FOMC meeting minutes (our marked-up version) release came the shining of the light of dovish benevolence from on high. It could have been biblical if it were not so mundane. After all the recent Chair Yellen and other Fed member refutation of the previous press and analyst inferences of the more aggressive removal of accommodation by the FOMC, why was there such potentially hawkish anticipation accompanying the minutes that flowed from a more accommodative than expected meeting? Simple. In a word it was the feared specification of the beginning of the Fed balance sheet ‘reduction’. That is indeed cause for some concern after the 2013 ‘taper tantrum’ once Chair Bernanke announced reduction in Fed purchases of debt securities as part of ending its Quantitative Easing (QE) program.
Yet, there it was in all its uplifting glory on page 9 of the minutes: still no specification of the meeting at which the Fed would announce the start of the reduction of its admittedly Brobdingnagian balance sheet. That was against the expectation that the FOMC had indeed decided a date certain to begin that process at the July meeting.
And the market impact was immediate on the US equities deciding that the lack of a more aggressive ability to begin that balance sheet reduction is a weak sign, which left equities under some pressure. The knee-jerk reaction in govvies was an obvious price recovery (i.e. lower yields) reflecting both that soft psychology and the prospect of less securities potentially tendered back into the market as soon as previously expected. And foreign exchange saw the US Dollar Index weaken from resistance as recent modest weakness in the euro was reversed on EUR/USD ratcheting back up from its 1.1700 near-term support.
So the minutes reflect the Fed’s continued quick small steps dance to adjust its view while still trying to sound vigilant on inflation. In that regard this is like a ‘minuet’, which is a social dance of French origin for two people. That was possibly from the French ‘menu’ meaning slender and small, referring to the small steps of the dance.
Yet the major ‘big steps’ theme remains the previously noted analytic dislocation…
Authorized Subscribers click ‘Read more…’ (below) to access balance of the discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review options. As this is a ‘macro’ assessment, Market Observations remain the same as last weekend’s WEEKEND: NOKO Crisis Redux post that were updated (lower section) after Monday’s Close, and there is no Extended Trend Assessment in this post.
NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by the Trump administration will hopefully still be approved by the Republican Congress and diminish the similar fears we had to what transpired in 2007-2008.
▪ …that is the failure of the Phillips Curve. As noted in our July 20th Commentary: ‘Normalization Bias’ NOT Back Redux post section entitled “Abandoning the Phillips Curve”, “…on the breakdown between higher inflation being driven by stronger employment, many more previous adherents to the central banks hypothesis that inflation needs to be anticipated and proactively fought are abandoning that view.” And the latest to do so has expressed this in significantly radical terms…
…as in wait to see the actual inflation prior to doing anything. That is because it is unlikely to be strong enough to represent a real threat. While this was also a major theme of Fed Governor Lael Brainerd’s speech just prior to Janet Yellen’s most recent (more dovish) Congressional testimony, it was St. Louis Fed CEO James Bullard who really set the cat loose among the canaries back on August 7th. That was the Monday after the latest stronger-than-expected US Employment report.
In a CNBC article and video Steve Liesman reviews his remarks on not just, “"The current level of the policy rate is likely to remain appropriate over the near term…" but also (and this is the most important bit on the old Phillips Curve theory failing) as the accompanying article goes on to note, “…personal consumption expenditures (PCE) price index excluding food and energy, which is the Fed's preferred gauge of inflation, has been running at 1.5 percent…”
And most importantly… “That measure is forecast to rise only to 1.8 percent if the U.S. unemployment rate falls to an "unprecedented" 3 percent from the current 4.3 percent…” Wow!! While this is significantly consistent with what Bullard has been saying for more than a year, most of his Fed colleagues are still pointing to the labor market as a reason to be anticipatory on removal of accommodation to counter the looming inflation they see coming; even though that has always failed to materialize on this cycle.
There is also much more in that July 20th Commentary: ‘Normalization Bias’ NOT Back Redux post on the failure of the old models and a very enlightened suggestion from a highly qualified source on how to now view the situation. Yet Bullard’s comments reinforcing the degree to which the old models are not working are reflected by the views from other central bankers, like the ECB’s Mario Draghi who was also a major focus of that July 20th post. We highly recommend a read for anyone who has not done so already.
And as part of Bullard’s cautionary words on the inflation outlook he noted, “…recent readings of low inflation are ‘concerning’ because they may not be temporary but indicative of persistent factors such as better technology that is driving down the price of many goods and services.”
The Fed was burned by previous strong communication on looming rate hikes during all of 2015 into the first half of 2016 (the Fed’s “normalcy bias” phase) only have to hold fire. That is likely why FOMC is now rightfully more cautious about definitively implying future actions. Hence it should not have been that much of a surprise that the FOMC was not able to agree a specific meeting at which it was going to announce the beginning of the balance sheet reduction program.
So even though many had inferred that would be its major September 19-20 projections revisions and press conference rate decision meeting, all bets are now off. This now feels a lot more like the 2015-2016 ‘jawboning’ the rate increase phase that did not bring any real activity until the end of 2016.
▪ There is no Extended Trend Assessment in this post. In spite of the short-term impact of various matters reviewed previous, the Market Observations remain very much the same as Monday’s update of the last weekend’s WEEKEND: NOKO Crisis Redux post.
Thanks for your interest.
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