10Y economy fed fomc inflation

Read These Instructions Before Handling Fragile Fed Minutes

Obviously, interpreting the January Fed minutes is going to be a self-referential nightmare bordering on the absurd.

Obviously, interpreting the January Fed minutes is going to be a self-referential nightmare bordering on the absurd.

They are of course “stale” by definition but then again, they are also “fresh” to the extent they shed some light on the committee’s outlook for inflation and also for what everyone was thinking in terms of the administration’s decision to add fiscal stimulus to an overheating economy.

The focus is on the addition of the word “further” to the statement. I’ve talked about that more times than I wanted to over the past several days and I’m sick of it, but you know, c’est la vie. Basically, how many times are they going to hike this year? As you’re probably aware, some desks have already upped their forecasts, citing the likely economic impact of fiscal stimulus.


“Markets will be especially attuned to any explicit discussion of ‘further’ [and] we would not be surprised if ‘most’ thought it important to include the language to emphasize that the FOMC is not nearing the end of this rate hiking cycle,” Citi writes, before noting that “on the other hand, it would be a hawkish surprise to us (and to markets) if ‘some’ or ‘most’ thought it important to emphasize that a faster pace of rate hikes may be warranted.”

“At its January meeting the FOMC added the word ‘further’ to describe expected rate increases,” Goldman wrote over the weekend before telling you what they’re looking for today, which is this: “We will look for a discussion of the failure to upgrade the balance of risks, the degree to which participants upgraded their inflation outlook, and potential indications for the rationale to add the word ‘further’ to describe the expected rate increases.”

And then here’s BofAML:

The minutes from the January 31st FOMC meeting should show a Fed that has become more comfortable with the idea that inflation will be heading higher, albeit gradually. There were a few key changes to the statement around inflation which sent a hawkish signal. The FOMC noted that inflation on a 12-month basis should move up this year and stabilize around the 2% objective in the medium term. This was a decisive change from the December language which stated that inflation on a 12-month basis would remain somewhat below 2% in the near term. Adding to the conviction of higher inflation, the FOMC noted that market-based measures of inflation compensation have increased in recent months but remain low. Given the changes to the inflation language, we expect a lengthy discussion around inflation risks with opinions on both sides of the debate, but generally leaning toward acceptance that the trend will be higher.

The FOMC meeting was prior to the brief stock-market sell-off, so clearly there won’t be mention of market turmoil. However, we suspect there will be a discussion about financial stability risks and stretched valuation given how quickly the stock market ran up throughout January. We also think there may be a discussion about the future monetary policy framework, as a continuation from the conversation at prior meetings and especially since it was Janet Yellen’s last FOMC meeting.

Right and again, since that meeting all of the data has pointed to what looks like the first real signs of a sustainable pick up in price pressures and that has led the market to speculate on whether the Fed, under a purportedly more “hawkish” Chair, will now look to move ahead more aggressively – especially in light of expansionary fiscal policy which has the potential to bring forward the end of cycle, etc. etc.

The dollar hasn’t known what to do of late and there’s a vociferous debate about exactly what’s going on with the greenback which is caught between higher rates and a tightening cycle on the one hand and an administration hell-bent on plunging the country into the fiscal abyss and jawboning the currency lower on the other.

As Goldman wrote earlier this week, there’s nothing particularly unusual about the dollar weakening as the Fed hikes.

“Of the six tightening periods since 1980 (including the current one), half have been associated with Dollar strength and half with Dollar weakness,” the bank reminds you:


For whatever it’s worth (which is nothing because there is no rhyme or reason to any of this anymore), here’s what the dollar has done since the CPI beat:


And here’s 10Y yields, just begging for an excuse to get to 3% so everyone can lose their fucking minds:


So there you go, that’s everything you should need to try and draw some kind of conclusions from today’s highly-anticipated account of a policy meeting that happened before all of the important events that transpired in February.

Again, the irony here is that a discussion which happened before new evidence of inflation hit will invariably be used to draw conclusions about how the people who had that discussion will interpret that evidence next month and the actions of the people drawing those conclusions will in turn feed back into the policy maker reaction function in an endless merry-go-round of reflexive fuckery.

Remember: failing to follow the instructions when it comes to reading Fed tea leaves can lead to potentially hazardous outcomes.



1 comment on “Read These Instructions Before Handling Fragile Fed Minutes

  1. Ok Heisy, you heard it here:

    10-yr rates are not going much higher. If they do reach the 3.5-4.0% range, then the markets will be forced to correct, there will be a real incremental headwind on the real economy from higher debt service costs, and the fed will be forced to respond to economic contraction with additional QE and by LOWERING interest rates.

    As usual, the dominant market narrative, so keen to hyperfocus on a single data point here and there, is just flat out wrong. I’ll be adding to my 10-yr treasury positions around 3.5%, and I’m already adding to TLT.

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