FOMC Minutes Show Patient-er-For-Longer, "Foreign Risks"-Fearful Fed

The January statement had only modest changes so reading the tealeaves of the FOMC Minutes 'should' provide little additional color with the main focus on the meaning of 'patient', fears over 'international developments', the 'right' gauge of inflation, and pace of rate lift-off...

  • *MANY FED OFFICIALS INCLINED TO STAY AT ZERO LONGER: MINUTES
  • *MANY OFFICIALS FELT DROPPING `PATIENT' MAY LEAD TO DATE FOCUS
  • *MANY FED OFFICIALS SAW RISKS IF FOREIGN WEAKNESS WORSENED
  • *FED OFFICIALS AGREED POLICY SHOULD STAY DATA DEPENDENT

It appears The Fed is 'worried' again... lower for longerer...

Pre-FOMC Minutes: S&P Futs 2091.25, 10Y 2.122%, Gold $1201.50, WTI $52.05

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It's been a good 3 weeks for stocks and oil since The FOMC Meeting...(and not for Bonds and PMs)

 

Additional headlines:

  • *MANY FED OFFICIALS INCLINED TO STAY AT ZERO LONGER: MINUTES
  • *FED OFFICIALS AGREED POLICY SHOULD STAY DATA DEPENDENT
  • *FED SAYS CONTINUED TEPID WAGE GROWTH COULD RESTRAIN SPENDING
  • *FED EXPECTED STRONGER DOLLAR TO BE PERSISTENT DRAG ON EXPORTS
  • *A FEW FED OFFICIALS NOTED RISK DOLLAR COULD STRENGTHEN FURTHER
  • *FED MINUTES NOTED RISKS FROM CHINA, MIDEAST, UKRAINE, GREECE
  • *FED OFFICIALS SAW RISKS TO OUTLOOK NEARLY BALANCED AT JAN. FOMC
  • *FED OFFICIALS SAW RISKS TO OUTLOOK NEARLY BALANCED AT JAN. FOMC
  • *MANY FED OFFICIALS SAW RISKS IF FOREIGN WEAKNESS WORSENED

The key sections from the minutes:

Many participants indicated that their assessment of the balance of risks associated with the timing of the begin-ning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.

Not everyone agreed:

Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term.

But even the Fed knows that many > some. Still, can't backtrack fully now while the facade of the US recovery is about to crash and burn, so the Fed has to do it step by step.

Regardless of the particular strategy undertaken, it was noted that, provided that the data-dependent nature of the path for the federal funds rate after its initial increase could be communicated to financial markets and the general public in an effective manner, the precise date at which firming commenced would have a less important bearing on eco-nomic outcomes.

It gets better: the Fed no longer has any idea what indicators to point to in order to keep rates at zero with the S&P at 2100:

There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization.

In other words, just like porn, the Fed will know a recovery when it sees it.

And here is something odd: apparently the Fed and the BLS don't look at the same data:

Several participants noted that there were signs of layoffs in the oil and gas industries, and that persistently low en-ergy prices might prompt a larger retrenchment of em-ployment in these industries. In addition, it was ob-served that if capital investment in energy-producing in-dustries slowed significantly, it could damp the overall expansion of economic activity for a period, especially if the slowing took place after most of the positive effects of lower energy prices on growth in household spending had occurred.

Lastly, none other than the Fed now appears displeased with the definition of inflation, or as the case may be, deflation:

A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate infla-tion. It was pointed out that the recent intensification of downward pressure on inflation reflected price move-ments that were concentrated in a narrow range of items in households’ consumption basket, a pattern borne out by trimmed mean measures of inflation.

We could go on but the gist is clear: the Fed has no idea what it is doing, and finally realized with the entire world lowering rate, the Fed simply can't hike.

And with that, German and Japanese pension funds are delighted they can resume buying Treasurys.

Full Minutes: