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FOMC Minutes Preview: Reasons To Be Fearful?

Tyler Durden's picture




 

The FOMC surprised the market on March 18 by lowering "the dots" by about 50 basis points. While Yellen gave a fairly exhaustive explanation for this in her speech on March 27 (and Dudley just managed expectations this morning), SocGen notes that market participants hope for more color from the FOMC minutes today. As for the timing of the rates lift-off, the FOMC minutes are unlikely to offer any new insight.

 

Via SocGen, FOMC minutes – looking for reasons for lower “dots”

Despite removing the reference to “patience” from its rate guidance, the FOMC projected a very dovish message on March 18. Specifically, it surprised the market by lowering the entire rate trajectory (i.e. the “dots”) by about 50 basis points, suggesting a much gentler rate path than previously envisioned. Following the meeting, we were left unsatisfied by the explanations given for this revision. During the press conference, Yellen gave partial reasoning behind it, pointing to a lower assessment of NAIRU which was revised from 5.2-5.5% to 5.0-5.2%. However, this was not a sufficient explanation in our view since the Committee also revised its forecast for unemployment by roughly the same amount, suggesting no change in the outlook for labor market slack. The medium-term forecast for unemployment rate also did not change, which led us to believe that the Fed had suddenly relaxed its reaction function for unexplained reasons.

While we hope for more color from the FOMC minutes, Yellen gave a fairly exhaustive explanation for this in her speech on March 27. In it, she highlighted three special considerations that may bear on the pace of tightening in addition to data dependency; all three suggest a slower-than normal tightening cycle.

The first is a risk that the equilibrium real interest rate (RIR) – currently estimated near zero but eventually expected to rise to 1.75% - may not normalize as quickly as expected.

 

The second is the asymmetry in the effectiveness of monetary policy given the zero-bound.

 

The third is a desire to undershoot NAIRU for some time in an attempt to reverse some of the adverse supply-side developments resulting from the financial crisis, effectively buying insurance against a secular stagnation scenario.

For all these reasons, the Fed has decided that a gentler path is more appropriate. The dots suggest that this new view has broad support within the FOMC, but it will nonetheless be interesting to see the minutes for any new insight.

As for the timing of the lift-off, Yellen’s speech was also revealing in its clarity about the conditions for lift-off in rates; the FOMC minutes are unlikely to offer any new insight on this issue. She indicated that further improvement in the labor market would be the most important factor giving her “reasonable confidence” that inflation will return to 2 percent over the medium term. Importantly, a pickup in wage growth or inflation is not a necessary condition for hiking rates, although Yellen would be uncomfortable raising rates if underlying inflation pressures were to weaken. Of course, for the improvement in the labor market to continue, we need to see activity data consistent with above-trend growth and that is the missing element at the moment. We expect activity data to improve significantly during March-May, making the June meeting a strong contender for a lift-off in rates.

 

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Wed, 04/08/2015 - 12:09 | 5971151 nope-1004
nope-1004's picture

WGAF.

 

Wed, 04/08/2015 - 12:42 | 5971328 flacon
flacon's picture

This sums it up. Got your iocane powder?

https://www.youtube.com/watch?v=E2y40U2LvKY

 

Wed, 04/08/2015 - 12:09 | 5971153 Colonel Klink
Colonel Klink's picture

Rates won't lift off and IF they do, not until the appropriate people are notified in advance so they can take advantage of it. :cough:Goldman:cough:

Wed, 04/08/2015 - 12:33 | 5971274 buzzsaw99
buzzsaw99's picture

goldman is the notifi-ER NOT the notifi-EE

Wed, 04/08/2015 - 12:43 | 5971338 Colonel Klink
Colonel Klink's picture

Well made point, but still the point of the point anyways.

Nice double speak huh?  Maybe I should go work for the Fed.

Wed, 04/08/2015 - 23:35 | 5974063 TheReplacement
TheReplacement's picture

Whatever you said means bullish right?

Maybe I should be a sheeple.

Wed, 04/08/2015 - 13:08 | 5971476 aurum4040
aurum4040's picture

Rates will not rise, US debt cannot be repaid in that scenario and,  obviously, the farce real estate market and economy cannot function either. All are mathematical impossibilities. Outside forces will create the rate increases when the USD is no longer deemed the reserve currency. Just a matter of time. Will Goldman be aware at that point? I dunno, drug interventions and withdrawing from 40+ plus years of pure heroin use is pretty tough on the soul... er squid

Wed, 04/08/2015 - 12:12 | 5971169 ted41776
ted41776's picture

rates will NEVER go up again

Wed, 04/08/2015 - 12:15 | 5971193 buzzsaw99
buzzsaw99's picture

5 fucking %, yeah right.

Wed, 04/08/2015 - 12:16 | 5971197 ebworthen
ebworthen's picture

QE4 is more likely than a rate hike.

Or, 0.25% rate hike that crashes markets then back to ZIRP + QE4.

Wed, 04/08/2015 - 12:36 | 5971288 NihilistZero
NihilistZero's picture

Even more likely is the FED raises .25 and does EVERYTHING behind the scenes, including buying stocks directly, to make sure the market doesn't crash. Keep the shell game going while you continue to inch up rates by 25 basis points. Maybe even get some of the lemmings into the casino. And if mortgage rates rise you can get some of the hot money escaping Housing Bubble 2.0 into the S&P. Then at some point during the inevitable correction they have room to cut rates.

Wed, 04/08/2015 - 12:53 | 5971357 F0ster
F0ster's picture

If the FED has to raise rates and does what you say by keeping the market artificially levitated then one would expect the value of the USD to go even higher. The USD would drop if the market tanks. SO CONSIDER THIS, what has historically been the FED's strategy to increase the perceieved value of the USD,... a low GOLD price, so that being said consider the inverse, the FED may actually consider manipulating the GOLD price HIGHER as a mechanism to reduce a rising US Dollar in a heavily manipulated rising rate environment.

I know, I know it's crazy, but we live in the twight zone and a higher gold price may actually serve the raising rate strategy for the FED. Why would they leave gold out of the manipulation strategy, they never have before...

Wed, 04/08/2015 - 12:55 | 5971407 Lady Jessica
Lady Jessica's picture

The USD would drop if the market tanks. 

Why?

 

Wed, 04/08/2015 - 14:15 | 5971873 F0ster
F0ster's picture

Because the 'market' has become the bellweather for the currency around the world. U.S. treasury bonds would get sold and the currency would loose value.

Wed, 04/08/2015 - 14:28 | 5971951 NihilistZero
NihilistZero's picture

That doesn't make sense.  In a stock sell off people are usually in a flight to safety, which is cash.  And when you're talking 6 or 7 digits plus of cash that means treasury notes.  The same thing happened in 2008 if I remember correctly.

Wed, 04/08/2015 - 14:17 | 5971879 NihilistZero
NihilistZero's picture

A higher gold price doesn't benefit the Big 4 banks who own the FED.  A higher dollar can under certain circumstances.  Lending is at a standstill in this ZIRP environment.  A stronger dollar and the bursting of Housing Bubble 2.0 would lead to a large increase in the mortgage sector as well as increased activity in the main street economy.  Somewhat ironically a stronger dollar could get the FED the wage inflation it claims to be looking for as lowering household fixed RE and energy costs could lead to greater consumer spending at the local level which would lead to more hiring.  Also if there is a flight to cash/safety at any point interest on treasuries should stay low as demand dictates.

Wed, 04/08/2015 - 12:17 | 5971202 Inthegreen
Inthegreen's picture

If it's anything like last time then you better be prepared and don't be short - whack whack 

Wed, 04/08/2015 - 12:18 | 5971206 KnuckleDragger-X
KnuckleDragger-X's picture

They can't do what they need to do and can't tell the truth about why they can't. QE4 would have a very negative effect but that is the only choice they can allow. We need to let the market run on its own and start clearing all the bad paper but that would cause a giant butthurt on the major players and so will not be allowed. Of course when it all crashes due to the sheer weight of stupidity and greed, it won't be their fault because they were just following orders.....

Wed, 04/08/2015 - 12:19 | 5971211 Yancey Ward
Yancey Ward's picture

Also, if the minutes contains more of the letter Z than is normally found in English language, it could mean the Fed is asleep at the wheel.

Wed, 04/08/2015 - 12:27 | 5971245 buzzsaw99
buzzsaw99's picture

on the contrary, z is their favorite letter

Wed, 04/08/2015 - 12:19 | 5971213 pragmatic hobo
pragmatic hobo's picture

... just what the fuck is going on with chinese stocks today?

Wed, 04/08/2015 - 12:32 | 5971271 froze25
froze25's picture

They decided to go into full retard mode and go parabolic.  The great reset must be near.

Wed, 04/08/2015 - 12:27 | 5971244 BeerMe
BeerMe's picture

End the Fed!  6+ years of 0% interest rates has completely fucked long term markets.  Riding 0% for so long any rate hike will start to dismantle the last remnants of the economy.  The only way out is to stop the Fed because they are sending us down like kamikaze Japan.

Wed, 04/08/2015 - 12:31 | 5971259 Yen Cross
Yen Cross's picture

  These Fed. statements are starting to look more and more like a cage full of Macaque monkeys flinging their shit into a english translation machine.

Wed, 04/08/2015 - 12:32 | 5971270 Consuelo
Consuelo's picture

What can they do?   The horse is outta the barn (the trend away from $USD-based global trade.)   Credibility is on the line yes, but at this point in the tectonic shift out of and away from, U.S. '$bullying', does it really matter?  Would it even matter if they came out and said 'Skrew it - 5% rates tomorrow'...? 

Wed, 04/08/2015 - 12:40 | 5971302 Niall Of The Ni...
Niall Of The Nine Hostages's picture

Rates aren't going anywhere till people who aren't management or bankers start getting real pay rises. A generation of policymakers have devoted their careers to seeing that won't happen until American and Chinese wage levels converge, at the very earliest. And even China's year-in year-out 8 per cent growth (assuming it was genuine) seems to have stalled.

When Gentle Ben claimed rates won't return to normal in his lifetime, he may have meant it. 

Wed, 04/08/2015 - 12:42 | 5971330 YHC-FTSE
YHC-FTSE's picture

In other words when you get the unemployment rate back down, she might have a think about raising rates above fucking zero. Fat chance. As for inflation, there is no connection whatsoever between the Fed's idea of inflation and everybody else's who live in the real world. The magic 2-3% inflation rate that rings church bells all over the village as good tidings for a growing economy is a fantasy when the data is so fudged to force it there and the reality of main street sales show the empty folly of non-stop propaganda to keep the animal spirits high in the casino markets.

Non Accelerating Inflation Rate of Unemployment is exactly as it sounds - a bullshit marriage correlating the rate of employment with inflation, as if neither of these metrics don't move of their own accord.

Wed, 04/08/2015 - 12:42 | 5971333 Bell's 2 hearted
Bell's 2 hearted's picture

no matter

US has already entered a recession

might take late summer / fall before bullz notice, however

Wed, 04/08/2015 - 13:20 | 5971418 contrarianstrai...
contrarianstraighttalker's picture

I believe rates will stay around zero for decades to come..or else the game is OVER! So the establishment only has one way to go. I'm going all-in on risk as if the central banks ever allow the system to crack, it will be the end of the world as we know it. Wrote a blog piece yesterday, see below:

https://contrarianstraighttalker.wordpress.com/2015/04/07/a-sober-view-o...

 

Wed, 04/08/2015 - 13:00 | 5971436 madcows
madcows's picture

instead of calling them Hawks or Doves, we should simply call them Flame Throwers.

Wed, 04/08/2015 - 13:24 | 5971546 pakled
pakled's picture

"SocGen notes that market participants hope for more color from the FOMC minutes today."

 

Color?

Did somewhen say "color"?

We like "the color" here

 

 

/George Hearst & Company

 


Wed, 04/08/2015 - 13:56 | 5971740 FreeShitter
FreeShitter's picture

Rates WILL NEVER rise, savers will be fucked perpetually, and this market will continue to go higher until WWIII.

Wed, 04/08/2015 - 14:48 | 5972114 gcjohns1971
gcjohns1971's picture

They know they have to raise rates...or no one will listen to them anymore, assuming that all ills will be met with QE.

So don't ask if they will raise rates.  They will, and sooner than you probably think, and a smaller rise than you probably think.

 

WHY?

They have to raise rates as previously mentioned.

But we are due for another recession...and signs are that it will be another doozy!

So, they have to raise rates before the recession hits or the existence of the Fed will be questioned for doing exactly the opposite of what they've preached for 100 years...raising rates in a recesssion.

But they'll raise them timidly.

The recession never really left.  And it cannot be hidden much longer.  A stiff rate hike will crash the economy...or at least the crash the banks and the .01%'s asset wealth...  and they can't have that!

So...

They'll do a timid hike, and surprise in the near-term timing.

RATE HIKE IMMINENT!!!

Wed, 04/08/2015 - 23:43 | 5974086 TheReplacement
TheReplacement's picture

If they hike then QE4 (public version) will not be far behind.  Considering we are still in QE4 (covert version)... who knows.

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