Since The Federal Reserve cut interest rates (for the first time in over a decade), the world has started worrying about recession (and the 2s10s curve inverted)…
Which might explain why US equity markets have floundered as bonds and bullion have been bid…
And, yuugely disappointing for President Trump, the dollar is modestly higher.
But there is one thing that has dramatically improved… the economic data!!
And finally, setting the scene for today’s Minutes, the market is now demanding more rate-cuts for the rest of 2019 than it did BEFORE the actual Fed rate-cut (thanks to Trump’s escalation of the trade war and China’s currency response)…
So, what did the dissentful, pre-tariffs, Minutes show?
The Fed Minutes are problematic for markets as they confirm that “most Fed officials see the July rate-cut as a ‘mid-cycle adjustment” and not the beginning of an epic easing cycle that investors are demanding.
Additionally, here are the key takeaways from the minutes:
On the need to remain “flexible”:
A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook.
Most saw the rate cut as a “mid-cycle adjustment”, not the start of an easing cycle:
Most participants viewed a proposed quarter- point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months.
A rate cut is not to boost the economy but to mitigate risk:
A policy easing at this meeting would be a prudent step from a risk- management perspective.
Two ultra doves were heard: Bullard and Kashkari…
A couple of participants indicated that they would have preferred a 50 basis point cut in the federal funds rate at this meeting rather than a 25 basis point reduction.
… But there were more, who favored not cutting rates:
Several participants favored maintaining the same target range at this meeting, judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment.
As usual, trade was the big concern:
Participants generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook
… but “few” were worried about the inverted yield curve:
A few participants expressed the concern that the inversion of the Treasury yield curve, as evidenced by the 10-year yield falling below the 3-month yield, had persisted for about two months, which could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response.
Unlike the last crisis, this time around at least “several” Fed members are aware of what will crush the economy during the next recession:
Several participants noted that high levels of corporate debt and leveraged lending posed some risks to the outlook.
Until then, however, the economy appears to be running ok:
Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes
Even though inflation is seen as persistently low (if one doesn’t have a Fed charge card, it’s a little bit different):
A number of participants observed that overall inflation had continued to run below the Committee’s 2 percent objective, as had inflation for items other than food and energy.
Last but not least, the Fed hints at coming QE:
Participants noted that the experience acquired by the Committee with the use of forward guidance and asset purchases has led to an improved understanding of how these tools operate; as a result, the Committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted.
The bottom line nobody knows what is happening or will happen, so it’s best to “maintain optionality”
Members generally agreed that it was important to maintain optionality in setting the future target range for the federal funds rate and, more generally, that near- term adjustments of the stance of monetary policy would appropriately remain dependent on the implications of incoming information for the economic outlook.
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Ahead of the FOMC Minutes, the odds of a 50bps cut in September had fallen to 11% (but still above where they were at the last Fed meeting).
What will the (admittedly dated) Minutes do to attitudes now?
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Full Minutes below: