I’m not sure how much we can reasonably be expected to extract from the May Fed minutes, given that the statement pretty clearly suggested the committee is inclined to look past “transitory” weakness in growth and given that apparently, we can scapegoat cell phone service plans for lackluster inflation.
But in light of recent political events and the fact that a week ago, hordes of retail investors suddenly discovered that benchmarks can go down as well as up, I suppose some folks will be particularly interested to find out if they can add “imminent Fed hike” to their list of things to be concerned about. And then there’s the “details” of the balance sheet rolloff.
Ultimately, in the absence of a complete meltdown in stocks, this whole thing comes down to whether the Fed wants to try and lean against an overheating labor market now or whether they’d rather wait for realized inflation to move higher.
I’m sure it’s occurred to them that Trump is likely to get impeached and that to whatever extent his agenda was helping the reflation meme along, those expectations have been completely unwound. But we’re not going to get anything on that from the Minutes.
Perhaps the most interesting thing here is the juxtaposition in positioning. Here’s Bloomberg with a bit more on that:
Latest CFTC data shows the most extreme speculator positions currently sit in 10Y futures — which recently grew to heaviest longs since January 2008 — while futures positioning remains near record shorts across eurodollars.
- The turnaround in speculator TY longs has been sharp, following the biggest short unwind on record that occurred three weeks ago
- Speculator eurodollar shorts remain near record levels, despite heavy $11.8M/DV01 cuts last week that were the most since 2014
- Long TY, short eurodollar positioning among speculator accounts leaves the market open to exacerbated moves, close to the June FOMC meeting
- A dovish take on the minutes may see sharp short-covering across front eurodollars, leading Treasury prices higher further out the curve, while a hawkish outcome could see intermediates out to 10s lead a wider move lower in price as accounts look to take profits on recently built-up longs
- Potential reason for dovish take may be soft CPI and retail sales data from May 12, while a dismissal of the data as “transitory” may result in a more hawkish view
- Leading into the minutes, current odds of a June hike based on OIS probabilities sit at 76%; a full hike and further 4bp is priced in for September; almost 1.5 hikes is priced in by year-end
Oh, and would you look at that, the Minutes are out.
Now you can parse them for yourself. Or maybe just ask Jon Hilsenrath.
Following are selected excerpts from the FOMC meeting minutes that concluded on May 3:
- “Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation. A number of participants pointed out that clarification of prospective fiscal and other policy changes would remove one source of uncertainty for the economic outlook.”
- “With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.”
- “Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.”
- “Nearly all policymakers expressed a favorable view of this general approach. Policymakers noted that preannouncing a schedule of gradually increasing caps to limit the amounts of securities that could run off in any given month was consistent with the Committee’s intention to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner as stated in the Committee’s Policy Normalization Principles and Plans. Limiting the magnitude of the monthly reductions in the Federal Reserve’s securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates. The approach would also likely be fairly straightforward to communicate. Moreover, under this approach, the process of reducing the Federal Reserve’s securities holdings, once begun, could likely proceed without a need for the Committee to make adjustments as long as there was no material deterioration in the economic outlook.”
- “The Committee also decided to maintain its existing policy of reinvesting all principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Members anticipated doing so until normalization of the level of the federal funds rate was well under way, and they noted that this policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
- “Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate. “
- “While recent data suggested a significant slowdown of growth in consumption spending early in the year, participants expected to see a rebound in consumer spending in coming months in light of the solid fundamentals underpinning household spending, including ongoing job gains, rising household income and wealth, improved household balance sheets, and buoyant consumer sentiment. “
- “The unemployment rate was projected to decline gradually over the next couple of years and to run somewhat below the staff’s estimate of its longer-run natural rate over this period; the staff’s estimate of the natural rate was revised down slightly in this forecast.”
- “Overall, most participants viewed the recent softer inflation data as primarily reflecting transitory factors, but a few expressed concern that progress toward the Committee’s objective may have slowed. “
- “Several participants emphasized that inflation measured on a 12-month basis had been running very close to the Committee’s 2 percent target. Overall, most participants viewed the recent softer inflation data as primarily reflecting transitory factors, but a few expressed concern that progress toward the Committee’s objective may have slowed. “
- “With regard to financial stability, several participants emphasized that higher requirements for capital and liquidity in the banking system and other prudential standards had contributed to increased resilience in the financial system since the financial crisis. However, they expressed concerns that a possible easing of regulatory standards could increase risks to financial stability. “
- “Overall, participants continued to see the near-term risks to the economic outlook as roughly balanced. Many participants saw the risks stemming from global economic and financial developments as having receded further over the intermeeting period. They pointed to the encouraging tone of recent data on economic growth abroad, which suggested some upside risks to foreign economic activity. “
- “In addition, it was noted that real estate values were elevated in some sectors of the CRE market, that a sharp decline in such valuations could pose risks to financial stability, and that potential reforms in the housing finance sector could have implications for such valuations.”