FOMC Signals Dovish Inflation Concerns, Warns "Sharp Reversal" In Markets Could Damage Economy

With a dumping dollar and collapsing yield curve since November's FOMC, all eyes are on the Minutes for any signals of The Fed hawkishly ignoring inflation concerns but instead a few Fed officials opposed near-term hikes (on the basis of weak inflation). Furthermore, several Fed officials warned of the potential for bubbles, "in light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances."

Bloomberg's Brendan Murray highlights the key aspects of The Fed Minutes

Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged. Nearly all participants reaffirmed the view that a gradual approach to increasing the target range was likely to promote the Committee’s objectives of maximum employment and price stability.


A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective.


Several participants indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee’s objective. A few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee’s commitment to its longer-run inflation objective.


In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy.


Several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years.


With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall. Many participants judged that the economy was operating at or above full employment and anticipated that the labor market would tighten somewhat further in the near term, as GDP was expected to grow at a pace exceeding that of potential output.


Overall, wage increases were generally seen as modest. A couple of participants expressed the view that, when the rate of labor productivity growth was taken into account, the pace of recent wage gains was consistent with an economy operating near full employment.


Several participants reported that business contacts appeared to be more confident about the economic outlook and thus more inclined to undertake capital expansion plans. In that context, it was noted that the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions was enacted; a few participants judged that the prospects for significant tax cuts had risen recently.


With the balance sheet normalization program under way and with the balance sheet not anticipated to be used to adjust the stance of monetary policy in response to incoming information in the years ahead, members generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements might not need to mention the program.

Of course, within the next few months many of these Fed heads wil be gone - so who knows what that means.

This being the Fed, some FOMC members were quick to point out that the asset bubble is getting bigger, and when it bursts, there will be deflationary hell to pay :

In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy.

Meanwhile, according to the staff, which clearly can read a Dow Jones chart, "asset valuation pressures across markets were judged to have increased slightly, on balance, since the previous assessment in July and to have remained elevated; leverage in the nonfinancial sector stayed moderate."

What is bizarre is the Fed's perpetually flawed assumption that financial leverage is somehow low: "in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low." It isn't: not only is vol vega all time high, but hedge fund leverage has never been higher as Goldman showed earlier today.

Finally, the most amusing part of the minutes was the Fed's confusion why the market not longer believe it has any intentions to - you know - tighten:

A few participants mentioned the limited reaction in financial markets to the announcement and initial implementation of the Committee’s plan for gradually reducing the Federal Reserve’s securities holdings. It was noted that, consistent with that limited response, market participants had characterized the Committee’s communications regarding the balance sheet normalization program as clear and effective.

"clear and effective."

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Since the Nov 1st Fed meeting, gold is the biggest winner as the dollar index has been in freefall...


And the yield curve has collapsed...


Which is odd given that market expectations for rate-hikes has continued to rise... now expecting almost 2.5 hikes in the next 12 months...


As a reminder, The Fed is normalizing the balance sheet - and as Yellen said last night - "so far so good"... So far The Fed (since the end of September) has shrunk the balance sheet by 0.17%... or 7.3Billion of a 4.5 trillion balance sheet


And finally - financial conditions have never been easier...

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Full Minutes


OpenThePodBayDoorHAL Five Star Wed, 11/22/2017 - 15:12 Permalink

These people are so completely f*cked up they don't even know it, they just telegraphed the worst possible thing: that they are letting/using the stock market levels as the driver for policy. I know this is no surprise for ZH readers. But it finally shows they do not care the slightest about economic activity, wage growth, standards of living, costs of goods and services. They care about billionaire shareholders and their offshore accounts. So, what, billionaires might spend less if the market goes down? A lamppost and a rope I say

In reply to by Five Star

Seasmoke Wed, 11/22/2017 - 14:16 Permalink

Good thing. Mr Yellen knocked down Gold $20 in a flash this week before this report came out today. Or we might have Gold at too high a price above all $1300

Dragon HAwk Wed, 11/22/2017 - 14:17 Permalink

Ok you 5 guys take the Pro and the rest of you take the con, and then we can break for Lunch. Somebody type this shit up and let's get out of Here. 

Imagery Wed, 11/22/2017 - 14:20 Permalink

Who the FUCK believes this TRIPE?The fucking FedRes and their owenrs TBTF WS along iwth IPOd Public Corps gorging themselves on infinite supplies of manipulated (ILLEGAL MONOPOLY Actions by private orgs FedRes and TBTF WS to manipulate rates to ZIRP) Taxpayer Monies are teh SOLE REASONS teh UFSA eCONomy is in the shitter to begin with.Hang these fucks already.......... 

adr Wed, 11/22/2017 - 14:32 Permalink

The only thing that a crashing market would hurt is the 1% and fake retail stores and corporations that have been ruining America for the past 40 years.

ThrowAwayYourTV Wed, 11/22/2017 - 14:33 Permalink

The economy needs to be damaged. Its an economy based on destroying everything around us as fast as we can. I/O/W its like shitting on the floor of your own house day after day after day.Kill It! Its the wrong way to go forward.

Conax Wed, 11/22/2017 - 14:44 Permalink

Wait til Friday my pretties, we will see some cheap silver and gold over the weekend.  They won't let that opportunity just pass by.The Fed balance sheet normalization chart is such a total farce, but yeah, so far so good..HAHAHAHA. such bullshit.

Automatic Choke 0hedgehog Wed, 11/22/2017 - 15:12 Permalink

Look at '87.    The ideal scenario is to crash the market right after a new Fed Chair takes over.   The old can blame it on the new and vice versa.Folks do this in industry all the time:   you "reorganize", which means all the managers swap teams that they manage, to bury a few bodies and write off a bunch of failed projects, without anybody accepting any blame. 

In reply to by 0hedgehog

buzzsaw99 Wed, 11/22/2017 - 15:19 Permalink

the reason the fed heads are perplexed is because market particpants are looking past all that.  past the rate hikes, past the balance sheet reduction bullshit, past the 10%+ stock market decline, all the way to the fed reducing rates and doing more qe again.  that's why the long end isn't budging.  the fed heads only look forward a few quarters or years to when they retire or change jobs or whatever.  what's left of (real i actually have to bear the consequences of my own decisions) markets are wise to all that crap.I know you've deceived me, now here's a surprise I know that you have 'cause there's magic in my eyes I can see for miles and miles and miles and miles and miles Oh yeah If you think that I don't know about the little tricks you've played And never see you when deliberately you put things in my way Well, here's a poke at you You're gonna choke on it too You're gonna lose that smile Because all the while I can see for miles and miles I can see for miles and miles I can see for miles and miles and miles and miles and miles Oh yeah... [/the who]

Soph Wed, 11/22/2017 - 15:37 Permalink

Good thing they put the commentary in regarding a "sharp reversal" hurting the economy. They have re-affirmed their commitment towards unlimited injections of capital and infinite QE.Let the bulls run, the most you will see anytime in the near future (give or take 10 years) is a 5-10% pullback,..which is of course meaningless.Fed's on the bid ad infinitum

Pernicious Gol… Wed, 11/22/2017 - 22:15 Permalink

I can't believe the balance sheet chart isn't shown with a vertical axis scaled to 400% of the decrease to date. Unless they want to communicate they won't really decrease the balance sheet.