Key update: it appears that in its rush to blast the fastest headline on the Minutes, Bloomberg made a material error, reporting the following:
- BBG: ALMOST ALL FED OFFICIALS WANTED TO HALT RUNOFF LATER THIS YEAR
That however is incorrect, and Reuters captured what the Fed really said, which is significantly different from what the Fed actually said, to wit:
- REUTERS (correct): ALMOST ALL PARTICIPANTS THOUGHT IT WOULD BE DESIRABLE TO ANNOUNCE PLAN TO STOP REDUCING BALANCE SHEET LATER THIS YEAR
And here what the Fed actually said:
Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year.
Needless to say, there is a huge difference between "ending runoff" and "announcing a plan to stop the runoff", as the former may last well into 2020 or even 2021.
Aside from that the highlights were in keeping with what Powell said in January namely that:
- The Fed will remain patient in light of ambivalent economic and market data.
- The Fed's outlook for the economy and the policy rate have both become more uncertain
- Keeping the current policy rate for now "posed few risks"
- As various Fed speakers noted recently, higher than expected inflation may be a requirement for more rate hikes
- The Fed was worried that the dot plot -which has become a Fed forecasting farce - is being "misinterpreted."
* * *
Amid today's "inclement weather" FOMC minutes delay, which prevented the Fed from releasing the Jan Fed meeting minutes to a media lockup ahead of their public release, thus making impossible the dissemination of headlines and prepared news stories to go alongside the minutes release at 2:00pm, there was a bit of a scramble to grab the most salient highlights from the Fed minutes for a meeting that was seen as pivotal for the Fed, one where the US central bank surprised with a dovish reversal, effectively putting on hold any further rate hikes while cautioning that it was prepared to adjust its balance sheet unwind which until that moment was said to be on "autopilot."
With that in mind, and with traders desperate to find any further hints of either renewed hawkish sentiment or a more pronounced dovish reversal, here is what has emerged as the key highlights from today's minutes.
On General economic conditions - nothing new here and the Fed continues to tread a fine line between being dovish on slowing economic conditions and hawkish on strong economic data, i.e. "data dependent":
- *FED OFFICIALS NOTED SOME DOWNSIDE RISKS HAD INCREASED
- *FED OFFICIALS SEE CONTINUED SUSTAINED EXPANSION
- *FED OFFICIALS SAY RECENT HOUSEHOLD DATA HAVE BEEN STRONG
- *FED OFFICIALS SEE STRONG LABOR MARKET, INFLATION NEAR TARGET
- *FED OFFICIALS NOTE BUSINESS INVESTMENT HAD MODERATED
On the increase in "downside risks":
- "the decline in inflation compensation might reflect in large part declines in risk premiums or increased concerns about downside risks to the outlook for inflation. This interpretation was seen as consistent with the behavior of the most recent survey-based measures of expected inflation, which were little changed."
On inflation expectations, the Fed appears to be turning more dovish; in fact according to the last bullet, the Fed may finally be realizing that Japanification is coming:
- "many participants commented that upward pressures on inflation appeared to be more muted than they appeared to be last year despite strengthening labor market conditions and rising input costs for some industries."
- "The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast, as well as the possibility that the dollar could appreciate if foreign economic conditions deteriorated."
- "In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had moved lower in recent months. Participants expressed a range of views in interpreting the decline in inflation compensation. On the one hand, that decline could stem from a decrease in expected inflation on the part of market participants. In that case, the current low levels of inflation compensation could suggest that inflation expectations are below the Committee's 2 percent inflation objective."
- "A few participants expressed concern that longer-run inflation expectations may be lower than levels consistent with the Committee's 2 percent inflation objective. Several participants judged that risks that could lead to higher-than-expected inflation had diminished relative to downside risks. The potential that various sources of uncertainty might abate more quickly than expected was mentioned as a potential upside risk for the economic outlook."
On the market's influence over the Fed:
- FOMC communications were reportedly perceived by market participants as not fully appreciating the implications of tighter financial conditions and softening global data over recent months for the U.S. economic outlook
Market participants pointed to a number of factors as contributing to the heightened volatility and sustained declines in risk asset prices and interest rates over recent months including a weaker outlook and greater uncertainties for foreign economies (particularly for Europe and China), perceptions of greater policy risks, and the partial shutdown of the federal government
- Market participants appeared to interpret FOMC communications at the time of the December meeting as not fully appreciating the tightening of financial conditions and the associated downside risks to the U.S. economic outlook that had emerged since the fall
Participants agreed that it was important to continue to monitor financial market developments and assess the implications of these developments for the economic outlook.
On the key issue of balance sheet reduction:
- Consistent with recent communications that the FOMC would be flexible in its approach to balance sheet normalization, the survey results also suggested that the respondents anticipated that the Committee would slow the balance sheet runoff in scenarios that involved a reduction in the target range for the federal funds rate.
- Some market reports suggested that investors perceived the FOMC to be insufficiently flexible in its approach to adjusting the path for the federal funds rate or the process for balance sheet normalization
- participants raised a number of questions about market reports that the Federal Reserve's balance sheet runoff and associated "quantitative tightening" had been an important factor contributing to the selloff in equity markets in the closing months of last year
- some other investors reportedly held firmly to the belief that the runoff of the Federal Reserve's securities holdings was a factor putting significant downward pressure on risky asset prices, and the investment decisions of these investors, particularly in thin market conditions around the year-end, might have had an outsized effect on market prices for a time
On the Fed balance sheet's composition in the future, the Fed appears willing to shift its MBS holdings to zero:
- "Participants commented that, in light of the Committee's longstanding plan to hold primarily Treasury securities in the long run, it would be appropriate once asset redemptions end to reinvest most, if not all, principal payments received from agency MBS in Treasury securities"
On the dot plot:
- “A few participants expressed concerns that in the current environment of increased uncertainty, the policy rate projections prepared as part of the Summary of Economic Projections (SEP) do not accurately convey the Committee's policy outlook. These participants were concerned that, although the individual participants' projections for the federal funds rate in the SEP reflect their individual views of the appropriate path for the policy rate conditional on the evolution of the economic outlook, at times the public had misinterpreted the median or central tendency of those projections as representing the consensus view of the Committee or as suggesting that policy was on a preset course.”
“However, some other participants noted that the policy rate projections in the SEP are a valuable component of the overall information provided about the monetary policy outlook.”
And the one section that the market will be mostly focused on: the Fed is actively contemplating ending QT in the second half:
- "the staff presented options for substantially slowing the decline in reserves by ending the reduction in asset holdings at some point over the latter half of this year and thereafter holding the size of the SOMA portfolio roughly constant for a time so that the average level of reserves would fall at a very gradual pace reflecting the trend growth in other Federal Reserve liabilities."
- Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year
Amusingly, as Bloomberg economics analyst Ben Baris notes, there was a discussion on the efficacy of the SEP projections, and whether they are conveying a useful message to the public. Some participants were concerned that the point estimates were being misinterpreted as committee members' consensus view on the appropriate policy path -- they are not. The projections look to be caught up in the larger discussion of appropriate communication strategies as we hover near the neutral rate.
Full minutes below (link)