Well, there’s certainly been no shortage of commentary with regard to what the “correct” interpretation of the May Fed minutes is/was.
Earlier today, former FX trader Richard Breslow argued that they were not, in fact, as “dovish” as the ensuing price action seemed to suggest and that price action is itself indicative of a kind of dangerous cognitive dissonance.
That’s probably true, but Cameron Crise has a different take on things. Specifically, his read on the minutes is that the market may have been correct to view them as dovish.
In his daily missive, Crise notes that when it comes to Fedspeak, there sure are a lot of “transitory” factors these days. In fact, “there have only been three meetings since Yellen took over that the Fed hasn’t cited ‘transitory’ factors.” One could, Crise goes on to write, “easily argue that the combined forces of globalization and technology have exerted a permanent downward influence on inflation, rendering current inflation targets futile.”
That gets us back to what we said this morning. Namely this:
The problem now is that we’re late cycle and we never really seemed to have hit escape velocity. That is, it kinda, sorta seems like the crisis may have permanently impaired the economy. We may, in other words, need to rethink what “healthy growth” is. Because if we keep comparing the post-crisis world to the pre-crisis world, the word “recovery” may have remain in scare quotes indefinitely.
That of course leads directly to what is perhaps the most important question of them all: if the purpose of accommodative policy was to revive the economy by inflating asset prices but the economic revival never fully materializes, then what are we left with?
The answer is simple: asset prices that are disconnected from economic fundamentals.
Crise’s advice in an environment where asset prices are elevated and the Fed is “bewildered”: “attend the party, [but] make sure [you] know where the nearest exits are located.”
The Fed’s latest message to markets has been taken as an all-clear to buy financial assets of virtually every stripe. Any why not? The FOMC has made it evident that they have little interest in stepping on anyone’s toes, and caution remains a by-word.
- The news that the Fed will start unwinding its balance sheet modestly and only gradually increase the pace of the run-off has been cheered by financial markets. It’s kind of remarkable that 10-year Treasury yields are within a few basis points of their 2017 lows with US stocks at all time highs.
- Market consensus looks for a rate hike in June and a balance sheet announcement in September. The Fed has chosen to characterize the pace of the inception of the run-off as deliberately cautious, but in a sense they don’t have a choice. Even letting $5 billion per month roll off in Q4 of this year represents a third of the maximum possible, though the pace of maturities accelerates pretty quickly next year.
- At this point I’d guess that they start by redeeming $5 billion per month in Q4, and then increasing that amount by $5 billion per quarter until the end of 2018. I have noted in the past that I don’t expect roll-offs to have much if any impact upon Treasury yields, and a cautious roll-off policy like this certainly doesn’t change that view.
- For a central bank that’s ostensibly in the midst of a tightening cycle, the Fed remains remarkably cautious. The minutes of the May meeting contained a litany of caveats and qualifications despite the ultimate conclusion that it should be appropriate to raise rates again “soon.”
- The FOMC correctly noted that wireless data plans are exerting a “transitory” downward impact upon inflation…
- …but you know what? There seem to be an awful lot of “transitory” factors these days. One could, and perhaps should, easily argue that the combined forces of globalization and technology (the “Amazonification” of retail) have exerted a permanent downward influence on inflation, rendering current inflation targets futile.
- There is certainly plenty of evidence that the Yellen Fed is unusually bewildered. I tabulated the usage of the word “transitory” in every set of Fed minutes going back to 2001. Its inclusion has increased dramatically in the past several years; in fact, there have only been three meetings since Yellen took over that the Fed hasn’t cited “transitory” factors.
- It’s a fun ride for financial assets when monetary policy is kept accommodative in the name of economic uncertainty or transitory factors. There’s certainly no guarantee that the party stops any time soon. Maybe I am just a grumpy macro man, but even when attending the party, I am going to make sure I know where the nearest exits are located.