Thursday’s Fed statement was clearly expected to be a “see you in December” type of deal, with no nod given to recent market turmoil.
As noted here on Sunday evening, it’s entirely likely that the Fed viewed the October drawdown in equities as useful to the extent it helps tighten financial conditions, discourages risk taking and acts as an indirect supply of convexity to the long end of the curve, effectively mitigating the risk of a disorderly unwind of the bond trade.
That’s the consensus assessment from Wall Street and if the Fed was indeed content to countenance some equity weakness in the interest of tightening things up, they succeeded. Here’s Goldman’s financial conditions index with the S&P and some possibly useful annotations.
“We think additional emphasis on financial conditions in the short statement would send too dovish a policy signal, especially because growth is currently still very strong and because several Fed officials have downplayed the sell-off in recent remarks,” Goldman wrote in their November FOMC preview.
BofAML agrees. “We do not expect the statement to address the recent volatility in financial markets as most Fed officials believe that overall financial conditions remain broadly supportive of growth”, the bank said last week.
The November FOMC meeting comes on the heels of robust wage data, another blockbuster jobs print (both of which should further support Jerome Powell’s conviction) and amid a November equity bounce that has the market back to pricing in 2 full hikes in 2019.
Meanwhile, EDZ9-Z0 is back positive (i.e., not inverted , as the market continues to adjust expectations for the end of the hiking cycle in real-time):
So that’s the backdrop for the November statement.
On the political front, Trump has been too preoccupied with other “matters” to lambast Jerome Powell, but one imagines he’ll get back to that in relatively short order. As for the midterms, I don’t see a compelling reason to believe that a divided Congress in the U.S. will materially change the Fed’s decision calculus. It’s true that another round of stimulus is now less likely (unless you think the President and Democrats will be able to reach an agreement on the long-rumored infrastructure deal), which may take a bit of pressure off in terms of the Fed having to worry about more overheating in the economy. But really, that ship has sailed – the economy is overheating and the October jobs report only underscores that contention. In a note dated November 4, for instance, Goldman wrote the following:
Inflation is on track for a meaningful overshoot of the Fed’s 2% target. In our baseline forecast of 2.3% for core PCE by late 2019, that overshoot remains within the Fed’s likely comfort zone. But we see the risks to this forecast as tilted to a bigger increase. The economy really needs to slow to avoid a dangerous overheating.
This means the Fed is likely to stay the course at least for now.
Oh, and if you don’t think the S&P fell enough in October to find a new equilibrium consistent with Jerome Powell’s efforts to restrike the “Fed put”, well then the November rally in stocks leaves us even further from that equilibrium.
Without further ado, here are the bullet points (there was a fair amount of chatter about IOER headed in, which is why that’s included in the bullets – more here).
- FED LEAVES IOER AT 2.20%, DISCOUNT RATE UNCHANGED AT 2.75%
- FED SAYS LONGER-TERM INFLATION EXPECTATIONS LITTLE CHANGED
- FED SAYS ECONOMY, JOB GAINS STRONG; LABOR MARKET STRENGTHENED
- FED REPEATS RISKS TO ECONOMIC OUTLOOK `APPEAR ROUGHLY BALANCED’
And here is the (expectedly short) statement (there’s a mention of slowing business investment, but that was to be expected):
Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.