Ok, so Bostic, Evans and Rosengren all came out dovish on Wednesday, thus reinforcing the recent Fed pivot and setting the stage for the December minutes.
Needless to say, these will be relentlessly parsed for any sign that the December meeting wasn’t actually as tone deaf as it came across.
“Participants likely discussed whether it is appropriate to remove the perceived time dependent guidance of ‘further gradual increases’ and replace it with a more data dependent statement”, BofAML wrote last week, adding that in their view, “it was a very close call and there should be a number of officials who were advocating for the latter reflecting concern about deterioration in data, especially given the proximity to the neutral range.”
Wednesday’s dovish procession deepened the dollar’s recent slide. The Bloomberg gauge very nearly fell through the October lows this morning after Bostic’s remarks. Here’s the slide:
Here’s what the picture looks like when you pan out.
Obviously, market participants will be interested in any further color from the minutes on the balance sheet, especially in light of the perception that Powell walked back his “auto pilot” characterization last week.
It’s worth taking a minute (get it?) to step back and think about how we got here. Long story short, there was “long way from neutral” (October 3); Powell’s first try at a “put” (November 28); the November Fed minutes, which betrayed support for conveying flexibility in an effort to dispel the notion that policy is on a preset course (November 29); the December Fed meeting and subsequent Powell presser which tanked risk sentiment and set the stage for Trump to deep-six the market entirely by stuffing everyone’s stockings with a government shutdown (December 19); and then, of course, Powell’s second, and ultimately successful, effort to calm markets last Friday.
Here’s an impossibly convoluted chart which tries (largely in vain) to illustrate all of the above by way of annotations for the notable days on top of SPX, nominal 10-year yields and the dollar.
And here’s an illustration of (basically) the ongoing tightening in financial conditions as manifested in the relentless rise of real yields (against a backdrop of plunging breakevens) and T-bill yields with the former having mercifully come off a bit of late.
Finally, here’s financial conditions (Goldman’s gauge) tightening markedly since “long way from neutral” before finally loosening up (top pane) plotted with HY and IG spreads with the former having come in rapidly over the past three sessions amid the risk-on euphoria.
So that’s the backdrop for the December minutes. Clearly, the market will be more than happy to celebrate if there are any perceptible signs that a balance sheet policy tweak is in the cards or that the statement language is right on the brink of getting a major facelift.
And with that, here are the bullet points:
- “With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy. Against this backdrop many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming.”
- “A number of participants noted that, before making further changes to the stance of policy, it was important for the Committee to assess factors such as how the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity, and the effects of past actions to remove policy accommodation, which were likely still working their way through the economy.”
- “A few participants, however, favored no change in the target range at this meeting, judging that the absence of signs of upward inflation pressure afforded the Committee some latitude to wait and see how the data would develop amid the recent rise in financial market volatility and increased uncertainty about the global economic growth outlook.”
- “In assessing the economic outlook, participants noted the contrast between the strength of incoming data on economic activity and the concerns about downside risks evident in financial markets and in reports from business contacts.”
- “In general, participants agreed that risks to the outlook appeared roughly balanced, although some noted that downside risks may have increased of late.”
- “With regard to the postmeeting statement, members agreed to modify the phrase ‘the Committee expects that further gradual increases’ to read ‘the Committee judges that some further gradual increases.’ The use of the word ‘judges’ in the revised phrase was intended to better convey the data-dependency of the Committee’s decisions regarding the future stance of policy; the reference to ‘some’ further gradual increases was viewed as helping indicate that, based on current information, the Committee judged that a relatively limited amount of additional tightening likely would be appropriate.”
- “A couple of participants pointed to risks to financial stability stemming from high levels of corporate borrowing, especially by riskier firms, and elevated CRE prices.”
- “Several participants remarked that longer-term TIPS-based inflation compensation had declined notably since November, concurrent with both falling oil prices and a deterioration in investor risk sentiment.”
- “The staff noted that during the transition to a long-run operating regime with excess reserves below current levels, the effective federal funds rate (EFFR) could begin to rise a little above the interest on excess reserves (IOER) rate as reserves in the banking system declined gradually to a level that the Committee judges to be most appropriate for efficient and effective implementation of policy.”
- “The staff reviewed a number of steps that the Federal Reserve could take to ensure effective monetary policy implementation were upward pressures on the federal funds rate and other money market rates to emerge. These steps included lowering the IOER rate further within the target range, using the discount window to support the efficient distribution of reserves, and slowing or smoothing the pace of reserve decline through open market operations or through slowing portfolio redemptions. The staff also discussed new ceiling tools that could help keep the EFFR within the Committee’s target range, including options that would add new counterparties for the Open Market Desk’s operations.”
- “The staff also provided a review of the liabilities on the Federal Reserve’s balance sheet; the review described the factors that influence the size of reserve and nonreserve liabilities and discussed the increase in the size of these liabilities since the financial crisis. Additionally, the staff outlined various issues related to the long-run composition of the System Open Market Account (SOMA) portfolio, including the maturity composition of the portfolio’s Treasury securities and the management of residual holdings of agency mortgage-backed securities (MBS) after the Committee has normalized the size of the balance sheet.”
- “Several participants noted that a portfolio of holdings weighted toward shorter maturities would provide greater flexibility to lengthen maturity if warranted by an economic downturn, while a couple of others noted that a portfolio with maturities that matched the outstanding Treasury market would have amore neutral effect on the market.”
- “With regard to the MBS portfolio, participants noted that the passive runoff of MBS holdings through principal paydowns would continue for many years after the size of the balance sheet had been normalized. Several participants commented on the possibility of reducing agency MBS holdings somewhat more quickly than the passive approach by implementing a program of very gradual MBS sales sometime after the size of the balance sheet had been normalized.”
And here are the full minutes which you can parse to your heart’s content:fomcminutes20181219