Since statement and press conference on Dec 11th, where Powell reiterated that The Fed would be on hold unless something yuuge "material reassessment in the outlook" happened, gold is the best performing asset-class (outpacing stocks) as the dollar has been the laggard...
And while it has been volatile, expectations for Fed actions (implied by the market) in 2020 are now slightly more dovish than before the Fed meeting...once again pricing in at least one rate-cut this year...
Thirteen of 17 officials forecast rates would be unchanged through the 2020 U.S. presidential election year, according to updated economic projections issued at the time, with four penciling in a quarter-point increase.
Of course, the big issue that The Fed was quietly panicking about was the repo crisis, which they have extinguished (for now) thanks to hundreds of billions of dollars puked across the 'turn' to ensure the holes are filled. As we noted previously, the price of year-end stability was $414 billion... $256 billion in repo injections ($211.4 term and $44.3 in overnight) and $157.5 bn in Bill purchases.
All of which has lifted stocks globally...
And as a reminder, The Fed has begun - for all intent and purpose - monetizing US debt.
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So what exactly are investors looking for in the Minutes that could spook markets? Not much in the traditional sense:
“There is a satisfaction of where they are with monetary policy but there’s uncertainty about the repo market and how it is working,” said Diane Swonk, chief economist with Grant Thornton in Chicago.
“The Fed is trying to keep the market liquid. Their comfort with the repo market is much less clear-cut. It does feel like a work in progress.”
But money-market participants are anxiously awaiting any signals that The Fed might give on its longer-run operational plans (as Fed's Evans hinted earlier today at a standing repo facility - bailout fund - going forward).
“Any views on repo markets outlined in the minutes should probably be adjusted for the year-end results, which on net have likely bolstered the Fed’s confidence that they have regained control of repo markets,” NatWest strategists led by Blake Gwinn say in Friday note
Information on the Fed’s longer-run operational plans or even their “perceived role in stabilizing funding rates or tolerance for volatility,” would be welcomed, they said. NatWest expects the central bank to start pulling back on their direct repo involvement in early 2020, and to start tapering their reserve-adding bill purchases in 2Q
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Here are the key takeaways from the FOMC minutes:
The message on rates echoed Powell’s comments at the Dec. 11 press conference. Following cuts at the three previous meetings, policy makers now regarded the current 1.5%-1.75% fed funds target range as “likely to remain appropriate for a time” as long as economic growth holds up and there isn’t a “material reassessment of the outlook”
Even though no policy makers projected further rate cuts in the dot plot, many officials still saw economic risks as “tilted somewhat to the downside,” though some risks had eased in recent months. Some policy makers noted resilience in the economy and cooling trade tensions, but “new uncertainties had emerged” in trade with other countries along with persistent unrest in Hong Kong
The Fed offered some color on the move to omit a reference to “uncertainties” in the statement. FOMC members felt that global developments and muted inflation pressures remained “salient features of the outlook” and that retaining the language helped justify staying in an accommodative rate stance, while “uncertainties” had aided the prior rationale for cuts
The FOMC was briefed by New York Fed official Lorie Logan on additional options for actions around repo-market strains, including: (1) buying coupon-bearing, short-maturity Treasuries in case Fed’s T-bill buying hurt that market’s liquidity; (2) raising interest-on-excess-reserves rate (now 1.55%) to a level closer to middle of fed funds target range; and (3) realigning the overnight reverse repurchase rate (now 1.45%) to the bottom of the range. All options were presented as technical adjustments, not changes to monetary policy. Some officials brought up issues around the implementation of monetary policy for future discussion, including a potential standing repo facility and the composition of Treasuries on the Fed’s balance sheet.
The manager discussed two operational considerations around policy implementation. The first involved the risk that future Treasury bill purchases could have a larger effect on liquidity in the Treasury bill market in light of expected seasonal declines in bill issuance and the Federal Reserve’s growing ownership share of outstanding bills. If this risk were to materialize, the Federal Reserve could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity.
Purchases of these short-dated securities would not affect broader financial conditions or the stance of monetary policy. The manager also discussed expectations to gradually transition away from active repo operations next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels.
Policy makers reviewed the series of 14 “Fed Listens” events and judged that they reinforced the importance of sustaining the expansion so job gains can help more people left behind. Officials also decided to delay the annual reaffirmation of the long-run policy statement, typically in January, while they complete the monetary-policy framework review in the first half.
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The bottom-line is that this is less dovish than hoped for - as it signals The Fed won't necessarily keep the repo spigot wide open (although we suspect that's exactly what they will do once the market reacts to a sign that they might remove the punchbowl once again).
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Full FOMC Minutes below...