FOMC Minutes Show Hawkish Fed Eying "Very Strong Economy"; Fears Tariffs, Yield Curve

Having hiked rates and tilted hawkish in the June FOMC meeting, markets have signaled their displeasure ever since (stocks, yield curve down notably) but The Minutes show no sign of The Fed trying to jawbone that 'displeasure' back as they reassure that "gradual hikes are needed amid a 'very strong' economy."

The Fed Minutes also showed member give themselves an 'out' with a warning that "most Fed officials saw intensified risks around trade policy." Not just "some", or a "few"... but many. In other words, if Trump ends the economy into a tailspin, he will also prevent the Fed from hiking further.

Also of note The Fed highlighted that "a number of Fed officials said it was important to watch the yield curve slope."

And specifically on the number of rate hikes:

"Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation."

"With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020."

On trade:

"Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending."

"Many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy."

On inflation:

"In general, participants viewed recent price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis, although a number of participants noted that it was premature to conclude that the Committee had achieved that objective."

"Although core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term."

"Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn."

On fiscal policy:

"Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk."

On Europe and  EM Risks:

"Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs."

On the yield curve:

"A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States."

"Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices."

On the Fed's "accommodative stance"

"Participants discussed how the Committee’s communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the postmeeting statement indicating that ‘the stance of monetary policy remains accommodative.’"

On Fed balance sheet shrinkage:

"Consistent with the June 2017 addendum to the Policy Normalization Principles and Plans, reinvestment purchases of agency MBS then are projected to fall to zero from that point onward. However, principal payments on agency MBS are sensitive to changes in various factors, particularly long-term interest rates. As a result, agency MBS principal payments could rise above the monthly redemption cap in some future scenarios and thus require MBS reinvestment purchases. In light of this possibility, the deputy manager described plans for the Desk to conduct small value purchases of agency MBS on a regular basis in order to maintain operational readiness."

And perhaps most importantly, the Fed's discussion of what happens when the Fed's balance sheet shrinks "too much", as the head of the Bank of India discussed recently and warned of an emerging market crisis if the Fed continues shrinking its balance sheet, and how monetary policy can be managed when excess reserves shrink to the point where the market no longer responds to the Fed (as the recent 5bps IOER adjustment showed will happen):

"A few participants suggested that the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen  recently"

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The lack of belief in The Fed's dot plot expectations is as wide as we have seen it...


Since The Fed hiked rates in June, the US Treasury yield curve has collapsed (2s30s from around 55bps to below 40bps today), flashing a big red 'policy error' warning sign...


Which may help explain why stocks have performed so poorly (and bonds so well) since the hike...

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Full Minutes Below (pdf link)


ted41776 Cryptopithicus Homme Thu, 07/05/2018 - 14:20 Permalink

i didn't realize murkan snowflakes are having so many babies /sarc…

and this is how they're paid for…

maybe when they're old enough to work those balances will get paid down…

economists with their never ending doom porn, everything is awesome (unless they're not all babies, then we might be fucked)

In reply to by Cryptopithicus Homme

gmrpeabody JRobby Thu, 07/05/2018 - 14:50 Permalink


" Good friends son wants to move to Dallas due to girlfriend.  Well qualified and experienced not to expensive but not having any luck.    "

I would say he IS having good luck. If he gets job in Dallas, he WILL have 2 or mores hours a day in commute time. There WILL be fender-benders involved eventually. Road rage daily.., run away, don't walk.

In reply to by JRobby

KansasCrude gmrpeabody Thu, 07/05/2018 - 16:00 Permalink

gmrpeabody,  no argument there.   One of the companies I work for is just off downtown Dallas.  Short drive to Dealey Plaza...Been traveling down there for 22 years and its worse than I ever imagined it could get.  I had a solid six figure income plus bonus in the early 90's when my company decided to move there.  I told them after 6 months I was leaving they bribed me for another 9 months.  Went to work with another company down there but came back to KS..  Folks adapt, those that I work with either live very close or come in real early or late but they are natives.  Most are my age early 60's and are counting the days to retirement.  Selfishly I hope they stay on as long as possible cause they are great to work with.  Can't blame them for wanting out.   If you don't have to get on the commute every day it would be tolerable no state income tax is a great incentive.  I did 10 years in Chicago on the commuter trains that would beat the DFW traffic most any day.

In reply to by gmrpeabody

Proofreder ted41776 Thu, 07/05/2018 - 14:40 Permalink

OK, slightly OT, but what is not understandable is:

Was able to read the entire meeting notes - to be released at 2:00pm - shortly after 12 noon, EDT.

2:00 pm where ???  Iceland ?  Bond St. ?  KSA ?

One other thing - note that the FED refers to itself as the "System"   The Federal Reserve System - system of taking money from us for them.  The Creature from Jekyll Island indeed.

In reply to by ted41776

LawsofPhysics Thu, 07/05/2018 - 14:15 Permalink

"very strong economy"?!?!?  Then why the fact are the fuckers in banking and finance still getting access to all the money they want for 1.75% interest?!?!!?


I call bullshit.  Raise those rates motherfucker, I triple dog dare you!

conraddobler Thu, 07/05/2018 - 14:23 Permalink

It has a kind of evil beauty as a construction.

It's the pinnacle of lies to build a matrix then cast a reality play built upon only lies and maintain that lie in the face of reality for as long as possible using deception as your only tool in your toolbox.

Seriously they are challenging organized religion if they go on long enough they may take the title.

KansasCrude Thu, 07/05/2018 - 14:36 Permalink

Hang the effing lying banksters but make it slow.  The job market is alive if you want to work for $8/hour part time.  Or you have very special skills.  I live in an area with growth cancer getting  beyond overbuilt.  Now all the sudden those new builds with no tenants are at standstill no rush to finish if nobody is ready to move in.  Noticing the same in the hotter Johnson County market in the Kansas City region.  Construction is going to start showing real ugly.  Check Zillow for foreclosures growing amount in a sizzling hot real estate market (lol).  The pig lipstick is wearing thin.

Think even Dallas is slowing down.  Good friends son wants to move to Dallas due to girlfriend.  Well qualified and experienced not to expensive but not having any luck.