On Tuesday, Donald Trump did his best to inject a little drama into the release of the September Fed minutes when he told Fox Business the central bank is now his “biggest threat”, an Erdogan-esque move that further underscores the contention that America is on the fast track to becoming a banana republic.
October 16… TRUMP: FED INDEPENDENT AND HE DOESN'T SPEAK TO THEM: FBN
September 13… ERDOGAN: CENTRAL BANK INDEPENDENT, TAKES ITS OWN DECISIONS
— Heisenberg Report (@heisenbergrpt) October 16, 2018
Those remarks were the culmination of a week’s worth of incessant Fed bashing from the Oval Office. Last week, following the rout on Wall Street, Trump explicitly blamed Jerome Powell, calling the Fed “crazy” and “loco” and we’re all now left to wonder how long it will be before the FOMC replaces the “fake” news media as the “enemy of the people.”
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Unfortunately, that’s the context for the September Fed minutes.
The selloff in bonds that preceded last week’s equity rout can generally be ascribed to ebullient U.S. economic data and the read-through of that data for the Fed. Jerome Powell has seemingly gone out of his way to “prove” his data-dependent bonafides of late and again, that’s not something that pleases Trump.
“We will look for further discussion of why the accommodative language was dropped, the path of the policy rate relative to estimates of the neutral rate, and containing the labor market overshootâ€, Goldman wrote last weekend, previewing the minutes. BofAML echoed that assessment. “We expect they will elaborate on the removal of ‘accommodative’ [and] we also look for some debate around where neutral is, as well as an optimistic review of economic conditions supporting further gradual rate hikesâ€, the bank said Sunday.
In case it isn’t clear enough, special attention will be paid to any discussion of whether and to what extent there’s consensus on the need to create restrictive policy.
Notably, specs pared the massive 10Y short in the week through last Tuesday, but it’s still very stretched.
(Bloomberg)
Meanwhile, specs added to the net long in the dollar over the same period. That position is still stubbornly hanging out near the longest since January 2017.
Since the September meeting, yields have obviously surged:
(Bloomberg)
The curve of course steepened materially during the long end selloff. Here’s 2s10s since the September meeting:
(Bloomberg)
And here’s the dollar:
(Bloomberg)
Without further ado, below are the bullet point highlights from last month’s meeting of what Trump imagines is a cabal of nefarious conspirators hell-bent on undermining his trade war and undercutting the equity rally. A couple of quick notes: 1) it is unlikely that the first bolded point below will please the President, 2) the reference in the minutes to the policy divergence between the U.S. and the rest of the world driving dollar strength could be seen as an appeasement to Trump.
Highlights
- “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances.”
- “A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.”
- “All participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting.”
- “Almost all considered that it was also appropriate to revise the Committee’s postmeeting statement in order to remove the language stating that ‘the stance of monetary policy remains accommodative.’”
- “Estimates of the level of the neutral federal funds rate would be only one among many factors that the Committee would consider in making its policy decisions.”
- “A few commented that recent changes in federal tax policy had likely bolstered investment spending.”
- “A few participants offered perspectives on the term structure of interest rates and what a potential inversion of the yield curve might signal about economic prospects in light of the historical regularity that an inverted yield curve has often preceded the onset of recessions in the United States.”
- “Some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial stability.”
- “In general, participants viewed recent consumer price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis.”
