March rate hike odds are unchanged (below 40%) and the yield curve has flattened since The Fed's February statement (despite heavy jawboning and higher inflation data) and so the Minutes were expected to help ease the markets to not be surprised. And they were...MANY FED OFFICIALS SAW HIKE `FAIRLY SOON' IF ECONOMY ON TRACK. However, the Minutes also showed 'balance' by not proclaiming concern over inflation - *MANY FED VOTERS SAW ONLY MODEST RISK OF SIGNIFICANT INFLATION and FED OFFICIALS SAW DOWNSIDE RISKS FROM FURTHER DOLLAR STRENGTH.
Here is the key excerpt in which the Fed says a rate hike may be needed "fairly soon" if all goes according to plan...
key segment many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.
However in a surprising twist, some Fed members explicitly warned that the market has gotten ahead of itself and that Trump's fiscal policies may never materialize...
A few participants commented that the recent increase in equity prices might in part reflect investors’ anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy, which might not materialize.
The Fed also warned once again that "valuation pressures have risen" since the election:
The staff’s assessment took into account the increase in asset valuation pressures since the November elections... Overall, valuation pressures appeared to have risen for some types of assets.
And in another warning, the same Fed members warned that the VIX is too low:
They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.
We wonder if the Fed opining on implied vol is part of its 3rd, 4th or 5th mandate.
For those looking for the Fed to discuss the fate of its balance sheet, it only had this to say:
In addition, it was noted that the downward pressure on longer-term interest rates exerted by the Federal Reserve’s asset holdings was expected to diminish in the years ahead in light of an anticipated gradual reduction in the size and duration of the Federal Reserve’s balance sheet. Finally, the view that gradual increases in the federal funds rate were likely to be appropriate also reflected the assessment that the neutral real rate—defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential—was currently quite low and was likely to rise only slowly over time.
And then, for good measure, one more warning:
it was noted that other risks to financial stability might arise as the structure of funding markets evolved or if real estate asset values declined sharply. More broadly, it was pointed out that an environment of low interest rates and a relatively flat yield curve, if it persisted, had the potential to boost incentives to take on leverage and risk. Several participants emphasized that the increased resilience.
Our sense is that the Fed is not especially fond of the Dow trading above 20,700.
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The S&P Tech sector has not had a down day since The Fed's Feb meeting and while bonds and bullion are higher, it is The Dow that leads...
The yield curve has notably flattened...
And while March rate hike odds are up, they have stabilized despite equity exuberance...
Before the Minutes, March is at 38% and June at 78.4%
Full Minutes below (link):