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Trading  | October 17, 2018

After Powell’s ‘reassuring’ hawkish speech, following the briefly dovishly-interpreted Fed statement, all eyes are back on the FOMC Minutes today to see just how assuredly The Fed will stick to its 25bps-per-quarter trajectory, come hell (stock crash) or high water (inflation).

The labor market (judged by the unemployment rate) has rarely been lower and inflation is right at The Fed’s mandated goal so the biggest focus will be on any neutral rate discussions (see chart below on Fed rate trajectory) and any discussions of the potential for inverting the yield curve.

As Bloomberg Chief U.S. Economist Carl Riccadonnanoted

“The Sept. 25-26 FOMC meeting predated much of the recent volatility in financial markets. At the meeting, the broad majority of officials signaled a preference for an additional rate increase in December. Fed watchers will scrutinize the minutes for sources of vulnerability regarding policy makers’ collective conviction — the extent of inflation weakness or tightening of financial conditions — that could lead them to consider either a near-term pause or a slow trajectory of hikes next year.”

If Powell’s PR is anything to go by, the Minutes should be pitched hawkish…and it appeared to do so:

 A Number of Officials Saw Need to Hike Above Long-Run Level

A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level.”

The Fed is worried about asset bubbles…

“Some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial stability.”

The Fed does not see the use or removal of the word “accomodative” as a signal:

“Almost all considered that it was also appropriate to revise the Committee’s postmeeting statement in order to remove the language stating that “the stance of monetary policy remains accommodative.” Participants discussed a number of reasons for removing the language at this time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate announced after the Committee’s meeting would still be below all of the estimates of its longer-run level submitted in the  September SEP.”

FOMC Minutes confirm Powell’s implicit “hike until you break something” approach.

Here are the Key Takeaways from the Fed minutes:

  • To be restrictive, or not to be: that was the debate in these minutes, with some important semantics to dissect

    • HAWK “A few participants expected that policy would need to become modestly restrictive for a time”

    • HAWK “A number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances”

    • DOVE “A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation”

    • HAWK “All participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting.”

  • Why gradual hikes? To balance the risk of going too fast or too slow

    • “Economic activity rose at a strong rate,” household spending and business fixed investment “grew strongly,” and a few participants saw recent data reflecting a stronger economy than they expected

  • On Inflation:

    • Meanwhile, inflation remained near the 2 percent target and inflation expectations — which Powell says he’s closely watching — “were little changed on balance”; inflation is on track to stay near symmetric 2 percent on “sustained basis”

    • HIGHER “Tightening resource utilization and an increasing ability of firms to raise output prices were cited as factors that could lead to higher-than-expected inflation”

    • LOWER “lower-than-expected growth, a strengthening of the U.S. dollar, or inflation expectations persistently running below 2 percent were mentioned as risks that could lead to lower inflation.”

  • On Yield curve inversion:

    • “A few participants offered perspectives on the term structure of interest rates and what a potential inversion of the yield curve might signal about economic prospects in light of the historical regularity that an inverted yield curve has often preceded the onset of recessions in the United States.”

  • On Trade:

    • “Some participants commented that trade policy developments remained a source of uncertainty for the outlook for domestic growth and inflation.”

  • On global decoupling:
    • “The divergence between domestic and foreign economic growth prospects and monetary policies was cited as presenting a downside risk because of the potential for further strengthening of the U.S. dollar; some participants noted that financial stresses in a few EMEs could pose additional risks if they were to spread more broadly through the global economy and financial markets.”

  • And finally, what could cause the Fed to hike more:

    • “With regard to upside risks, participants variously noted that high consumer confidence, accommodative financial  conditions, or greater- than-expected effects of fiscal stimulus could lead to stronger-than-
      expected economic outcomes.”

President Trump will not be happy…

*  *  *

Since The Fed hiked rates in September, only gold has managed positive returns with the dollar and bonds modestly lower and stocks battered…

Additionally, the odds of a December rate hike remain around 75-80% (notice the volatility introduced briefly by Powell’s hawkish speech)…


Meanwhile, the market remains adamant that The Fed is wrong, implying rate cuts through 2019 (as opposed to the Fed’s hikes) despite Powell’s promises…

*  *  *
Full FOMC Minutes:

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