"Hawkish" Fed Shrugs Off "Transitory" Weakness In Data, Signals More Rate Hikes Ahead

Having perfectly top-ticked US economic data with its March rate-hike, the subsequent collapse in 'data' has been shrugged off as transitory (or seasonal) and by all indications The Fed seems set on two more rate hikes this year no matter what (even as the market diverges dovishly).

  • *FED SAYS GROWTH SLOWDOWN IN 1Q LIKELY TO BE TRANSITORY
  • *FED SAYS 12-MONTH INFLATION RUNNING CLOSE TO ITS 2% GOAL
  • *FED: JOB GAINS SOLID, HOUSEHOLD SPENDING ROSE ONLY MODESTLY
  • *FED: LABOR MKT CONTINUED TO STRENGTHEN EVEN AS GROWTH SLOWED
  • *FED REPEATS IT MAINTAINING BALANCE-SHEET REINVESTMENT STRATEGY
  • *FED SAYS FOMC VOTE WAS UNANIMOUS

There was no mention of the most hotly debated topic at this moment, the Fed's balance sheet. But at least the Fed was unified this time - there were no dissenters.

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Here are some of the most notable changes (in bold):

  • "Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed"
  • "Job gains were solid, on average, in recent months, and the unemployment rate declined"
  • "Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid"

The Fed commented that inflation is reaching its goal:

  • Inflation measured on a 12-month basis recently has been running close to the Committee's 2 percent longer-run objective

... although:

  • "Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent"

But the key phrase: slowing growth was transitory:

  • The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term

On net: a more hawkish than dovish statement.

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First things first, The Fed offered no explanation for the fact that they hiked rates during a quarter that saw just 0.7% GDP growth - the weakest quarter for a rate hike since 1980...

 

Since The Fed hiked rates in March, things have not gone the way they may have hoped... Gold and bonds are bid, stocks are unchanged and banks have been battered...

 

It is perhaps noteworthy that The Fed rate hike in March was the absolute top-tick in post-Trump US economic data - the collapse since then has been anything but 'transitory'...

 

Federal Reserve officials have suggested it will probably be appropriate to begin unwinding the central bank’s $4.5 trillion balance sheet later this year, but that guidance is premised in part on projections that they will be able to raise interest rates twice more before the year is out. However, investors see just one more hike in 2017 as more likely than two, according to the prices of federal funds futures contracts.

 

June rate hike odds continue to hover near 70% (despite economic data's collapse)...

 

But the market remains notably less hawkish than The Fed...

 

All eyes are on any commentary with regard The Fed Balance Sheet...

 

And don't forget, the maturation of The Fed balance sheet is chunky...

As Bloomerg reports, analysts expect the Fed will have to decide whether to roll over a certain percentage of its principal or announce a fixed dollar target of its Treasury and mortgage securities to unwind the $4.26 trillion of debt in a “passive and predictable manner.” Under the percentage option, the scale of the Fed’s balance-sheet reduction “will fluctuate significantly” from month-to-month.

Don't worry - *BERNANKE: I'M "QUITE CALM" ABOUT PLAN TO SHRINK BALANCE SHEET

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The FOMC word count continues to slide... The word count fell 4 from March to 517

 

Full Redline below: