The yield curve has collapsed since The Fed's hawkish September statement (but bank stocks have soared) as rate-hike odds hit 80% and balance sheet normalization is believed to be like watching paint dry. All eyes going into the FOMC Minutes were on just how transitory The Fed believed inflation's dip was - "many Fed officials concerned low inflation is not transitory," but schizophrenically "many Fed officials saw another rate hike warranted this year."
While the dollar was weak on the market's first skim of the minutes, with algos focusing on the "low inflation not only transitory", the offset was the noted bizarro preview that "another hike in 2017 is warranted", which confirms what we suggested one month ago, namely that the Fed is no longer data dependant, but will continue hiking until the Fed regains control over the stock bubble.
Furthermore, while it is clear that the Fed will keep a very close eye on inflation data into the December meeting, it is unclear just how it will be able to do that: as the minutes read: "Participants generally agreed it would be important to monitor inflation developments closely. Several of them noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.”
The next CPI print is this Friday, and it will be significantly impacted by the Hurricanes, to the upside: will the Fed ignore it or will it focus on this as confirmation of a job well-done and hike aggressively in the coming months?
Additional highlights include:
- All participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate
- Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors
- Overall, the available information suggested that, although the storms would likely affect the quarterly pattern of changes in real GDP at least through the second half of the year:
- Members judged that storm-related disruptions and rebuilding would affect economic activity in the near term, but past experience suggested that the hurricanes were unlikely to materially alter the course of the national economy over the medium term
- Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily
- Interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding
- A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist
- A couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.
- It was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted
- All agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate
- Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term
- Most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus
Here is how the Fed justifies kicking the can for nearly a decade:
Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective. A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist and that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective over the medium term.
Perhaps instead of inflation the Fed was envisioning stock prices. And speaking of the Fed's explicit mention of stock prices, some noted that the longer the Fed allows this bubble to grow, the more pain there will be on the other side. The funniest bit: the Fed can't explain why two years of hiking have resulted in record easy financial conditions.
Some other participants, however, were more worried about upside risks to inflation arising from a labor market that had already reached full employment and was projected to tighten further. Their concerns were heightened by the apparent easing in financial conditions that had developed since the Committee’s policy normalization process was initiated in December 2015. These participants cautioned that an unduly slow pace in removing policy accommodation could result in an overshoot of the Committee’s inflation objective in the medium term that would likely be costly to reverse or could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind.
Finally, the usual warning by a "couple" of participants that the Fed is creaing a bubble:
Many participants viewed accommodative financial conditions, which had prevailed even as the Committee raised the federal funds rate, as likely to provide support for the economic expansion. However, a couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.
The "couple" will again be ignored.
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As a reminder, inflation has been on a 'transitory' streak lower for a 'transitory' seven months in a row now... (and the most recent payroll sprint was the worst since 2010 - but transitory too we are sure).
Since the FOMC Statement on 9/20, hawkishly signaling more rate hikes and normalizing the balance sheet, stocks and the dollar have jumped and gold and bonds have fallen (albeit with Golden Week effects weighing heavily)...
And rate-hike odds for December have soared to 80%...
And while banks have outperformed, the yield curve has collapsed...
Not what the Fed was hoping for, we are sure.
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Full FOMC Minutes below: