FOMC Minutes Show Schizophrenic Fed Fears Low Inflation Is Here To Stay But Push For Another Rate Hike In 2017

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.

*  *  *

Full FOMC Minutes below:



EmmittFitzhume VWAndy Wed, 10/11/2017 - 14:17 Permalink

Not in the minutes - "We are fighting deflation because nobody has any fucking money to buy anything and we are giving big banks shitloads of fresh fiat who is in turn loaning it to companies to buy back their stock beause their earnings are down due to the fact that people have no fucking money to buy anything"

In reply to by VWAndy

CRM114 small axe Wed, 10/11/2017 - 14:20 Permalink

They fixed the inflation stats to suppress CPI to avoid increasing benefits. Now they can't unfix them to show true inflation without immediately generating massive demands for increases in wages and benefits (justified), because it would show the huge backlog that has arisen. And every month it gets worse. They're more f#cked than a f#cking f#cker that's just been gang-raped by the entire Nork Army.

In reply to by small axe

cynicalskeptic CRM114 Wed, 10/11/2017 - 20:37 Permalink

Inflation is at 8% minimum and even higher in most cities.The Fed et al WANT high inflation..  They promised to pay off debt - they NEVER promised the $US they were paying you back would have any buying power.  It's EASY to pay off trillions in debt when a loaf of bread costs a few Million $US.Just wait unti the rest of the world stops taking $us.   All the $$$ held overseas will come rushing back to the US to buy ANYTHING of tangible farmland, shares in ANY company... real estate .    Better to pay 10x the old price of somethign than getting stuck with paper money worth nothing.   The US will get bought up by the Chinese, Arabs and anyone else....  while Americans starve

In reply to by CRM114

GreatUncle Wed, 10/11/2017 - 14:21 Permalink

Got to love rate hikes over more QE ... guts the real economy out as purchasing falls much faster than increasing prices whilst the real economy stands still.It is all relative.

bobsmith5 Wed, 10/11/2017 - 14:22 Permalink

Schizophrenic Fed? Yes, they clearly are completely divorced from reality which is the consequence of the fake fiat monetary system they have created. There is no way to measure economic activity when the very system of monetary measurement is a lie. On top of that all markets are manipulated in every way imaginable by monster computers on steroid algorithms. This is the very essence of mental illness which is reflected in all of their decisions and cryptic nonsensical language.

Snaffew Wed, 10/11/2017 - 14:24 Permalink

their nonsensical, confusing and non-directional speech once agin causes an immediate market rally---plan is working perfectly.  tell them nothing and they will buy!

ted41776 Wed, 10/11/2017 - 14:27 Permalink

if currency is the official unit of measure for an average worker bee's life, then what is it they're progressing towards when they're trying to reach their inflation targets? also, how much of an idiot one would have to have been to expect the weimar stock "market" to crash just as hyperinflation took off?

steve2241 Wed, 10/11/2017 - 14:24 Permalink

They manipulated the inflation statistics down, when it suited them, they can't just manipulate them higher now.  No need to get "schizophrenic".  Unless the Powers That Be aren't as powerful as some make them out!

dark fiber Wed, 10/11/2017 - 14:45 Permalink

The Fed doesn't know what to do they have printed themselves into a corner.  All the current members of the board know is that they don't want this to blow up in their face and during their term.  They will do batshit crazy things to postpone the time of reckoning, because they are literally risking their  lives in case this thing implodes.

RedDwarf Wed, 10/11/2017 - 14:58 Permalink

Real economy is stagnant.  Velocity of money is low, defaults rising, credit falling.  In other words we are in the deflationary death spiral.  The demand for their fiat is collapsing.

Batman11 Wed, 10/11/2017 - 15:19 Permalink

How easy was it to see 2008 coming?Very weren’t looking in the right place, 1929 and 2008 stick out like sore thumbs.2008, was the wakeup call the Central Bankers slept through, others had started waking up way back in 1989 after the Japanese real estate crash. They have been given a lot of material to work with since to test their theories.Meet the new experts.Steve Keen - Minsky moments and affects of debt on the economyRichard Werner - Money and debt, bank credit and how it must be allocated for economic success, studying Japan around 1989Richard Koo - After the Minsky Moment, studied 1929, Japan 1989 and 2008.Michael Hudson - The history of economics, the difference between earned and unearned income 

adolphz Wed, 10/11/2017 - 15:37 Permalink

Come on  give some more doom n gloom so we can see dow 40 know How does SHEPWAVE know what stocks and gold are going to do every day. I am positioned for next big move. I am thinking it will happen at tomorrow's open in Hang Seng and gold markets.

pizdowitz Wed, 10/11/2017 - 15:59 Permalink

1) Stop pretending that a human is needed at the FED. Shut that boondoggle down. And sell that witless gnome to a circus.
2) Provide an infinite supply of money to anyone and everyone, anywhere and everywhere
3) Stick to it, and STFUP

Dode415 Wed, 10/11/2017 - 16:22 Permalink

If they are aiming to let the air out of the stock bubble it’ll take more than a telegraphed 25bps - 100 bps in December with no warning should do the trick if that’s what they want to do otherwise they’re wasting everybody’s time