FOMC Minutes Signal Fed On Hold Despite "Elevated Downside Risks"

Since The Fed cut rates on Oct 30th, Gold is the laggard (there's no more risk) as stocks have soared (trade deal hope) with the dollar and bonds practically unchanged...

The 30Y Yield is well below (and the yield curve is notably flatter) pre-FOMC levels...

Source: Bloomberg

And, rather notably, despite endless FedSpeak jawboning the fact that The Fed is on hold (and data-dependent) now; given today's move on trade-deal headlines, the market is now more dovish than it was right after The Fed cut in October...

Source: Bloomberg

And of course, while The Fed claims to have got the repo-calypse under control, it remains forced to puke ~$70 billion every day (not cumulative) to plug whatever hole there is...

All of which makes today's Minutes rather stale as it will be focused on the "end of the mid-cycle adjustment" just as the "mid-cycle" is set to collapse again as trade-deal hopes evaporate. Still, the minutes may provide some insight into what could prompt the Fed to move again on rates, be it higher or lower.

As a reminder, at the last meeting, The Fed cut rates by 25bps, as was anticipated. Hawkish dissent came from George and Rosengren again, although Bullard did not repeat his call for a deeper rate cut. The statement saw the Fed tweak its language on future rate moves, now stating it will "continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate," (from "will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion" - a line that the market had taken to meet that the door to further cuts was open); the tweak was subtle, which analysts said gives the Fed optionality on future moves. Additionally, much of the language on the economy was left unchanged

So what did they say?

Here are the Key Takeaways from the FOMC minutes (via Bloomberg):

  • While most Fed officials saw rates as “well calibrated” and likely on hold barring a “material reassessment” of the outlook, policy makers stressed the downside risks in justifying a third straight rate cut at the October meeting. Many also cited low inflation or price expectations.

  • The minutes illustrate a split on FOMC, as a “couple” of participants who backed a cut saw it as a “close call,” while “some” favored no change.

  • Policy makers generally expected consumer spending to “remain on a firm footing” and labor demand appeared strong, though trade uncertainty and sluggish global growth would continue to weigh on businesses.

  • Fed officials discussed additional options to control the benchmark interest rate following the start of large-scale repo operations and Treasury-bill purchases. Many policy makers saw a standing repo facility as a potentially “useful backstop,” though with ample reserves, “there might be little need” for such a facility or for frequent repo operations.

  • The FOMC held a discussion on the value of various nontraditional tools for easing when interest rates are near zero. The minutes indicated general support for forward guidance and large-scale asset purchases. On the other hand, there was skepticism about capping long-term rates, and “all participants” saw negative rates as unattractive, though officials wouldn’t completely rule out the option.

Some more key observations:

Fed Cut rates as insurance against global slowdown and low inflation...

In discussing the reasons for such a decision, these participants continued to point to global developments weighing on the economic outlook, the need to provide insurance against potential downside risks to the economic outlook, and the importance of returning inflation to the Committee’s symmetric 2 percent objective on a sustained basis.

Yet even so it was a "close call" with two participants who voted for a cut saying they were very much on the fence:

A couple of participants who were supportive of a rate cut at this meeting indicated that the decision to reduce the federal funds rate by 25 basis points was a close call relative to the option of leaving the federal funds rate unchanged at this meeting.

... but necessary, largely to offset global weakness:

Many participants judged that an additional modest easing at this meeting was appropriate in light of persistent weakness in global growth and elevated uncertainty regarding trade developments. Nonetheless, these participants noted that incoming data had continued to suggest that the economy had proven resilient in the face of continued headwinds from global developments and that previous adjustments to monetary policy would continue to help sustain economic growth

That said, looking ahead the Fed is now data-dependent as monetary policy now is "well-calibrated":

With regard to monetary policy beyond this meeting, most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee’s symmetric 2 percent objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook.

A couple of participants said not to expect more rate cuts:

A couple of participants expressed the view that the Committee should reinforce its post-meeting statement with additional communications indicating that another reduction in the federal funds rate was unlikely in the near term unless incoming information was consistent with a significant slowdown in the pace of economic activity.

Meanwhile in the US manufacturing was decidedly weaker than services:

Participants discussed developments in the manufacturing, energy, and agricultural sectors of the U.S. economy. Manufacturing production remained weak, and continuing concerns about global growth and trade uncertainty suggested that conditions were unlikely to improve materially over the near term.

There was some concern about jobs too:

... the labor strike at General Motors had disrupted motor vehicle output, and ongoing issues at Boeing were slowing manufacturing in the commercial aircraft industry. A couple of participants noted that activity was particularly weak for the energy industry, in part because of low petroleum prices. In addition, a few participants noted ongoing challenges in the agricultural sector, including those associated with lower crop yields, tariffs, weak export demand, and difficult financial positions for many farmers. One bright spot for the agricultural sector was that some commodity prices had firmed recently

As pertains to the one of the most controversial topics, whether to have negative rates in the US, the Fed for now disagrees:

All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States....  Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system.

... although if "circumstances" arise, the Fed will change its mind:

participants did not rule out the possibility that  circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool."

Circumstances such as a 20% drop in the S&P:

Finally, on the topic of QE4, pardon, NOT QE: "All participants expressed support for a plan to purchase Treasury bills into the second quarter of 2020." or beyond:

Many participants supported conducting operations to maintain reserve balances around the level that prevailed in early September. Some others suggested moving to an even higher level of reserves to provide an extra buffer and greater assurance of control over the federal funds rate.

The FOMC discussed how fast to buy T-Bills:

In discussing the pace of Treasury bill purchases, many participants supported a relatively rapid pace to boost reserve levels quickly, while others supported a more moderate pace of purchases.

A "few" participants indicated that NOT QE may expand into full blown QE:

A few participants indicated that purchasing Treasury notes and bonds with limited remaining maturities could also be considered as a way to boost reserves, particularly if the Federal Reserve faced constraints on the pace at which it could purchase Treasury bills.

And the punchline: the Fed rushed out the early NOT QE announcement despite a "couple" of participants warning it would be seen as a "dire situation requiring immediate action:"

Most participants preferred not to wait until the October 29–30 FOMC meeting to issue a public statement regarding the planned Treasury bill purchases and repo operations. They noted that releasing a statement before the October 29–30 FOMC meeting would help reinforce the point that these actions were technical and not intended to affect the stance of policy.

A couple of participants, however, wanted to wait until the October 29–30 FOMC meeting to announce the plan so as not to surprise market participants or lead them to infer that the Committee regarded the situation as dire and thus requiring immediate action.

"Dire situation", check. And the Fed was even nice enough to let us know when the next repo market crisis will strike:

In particular, financial institutions’ internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated. Although money market conditions had since improved, market participants expressed uncertainty about how funding market conditions may evolve over coming months, especially around year-end. Further  out, the April 2020 tax season, with associated reductions in reserves around that time, was viewed as another point at which money market pressures could emerge.

Looking at the statement from the perspective of a couple, some, several, many, most:


In summary, the minutes don't change what the market knows from listening to Powell and various other Fed speakers recently, which explains a lack of reaction in bonds, stocks, the dollar, or Fed Funds.

*  *  *

Full Minutes below: