Fed Minutes: Most Say Outlook, Risks Warrant Leaving Rates Unchanged For The Remainder Of 2019

There’s a certain sense in which it doesn’t matter what the March FOMC minutes reveal about the rationale behind the Fed’s signaling that rate hikes are off the table in 2019.

For one thing, the dots had to “catch down” (if you will) to the January pivot, so it was just a matter of how dramatic the shift would be, but more importantly, the institution itself is under siege from the White House, where Donald Trump seems hell-bent on politicizing the central bank and making monetary policy beholden to the MAGA vision.

Indications that Stephen Moore and Herman Cain may be bound for the Fed have unnerved some observers (and by “some”, we mean “many”), and not just because they are both partisan hacks. The real problem is that neither man is qualified and it’s not at all clear how they could possibly contribute anything of value, Larry Kudlow’s “diversity of opinion” protestations aside. The sole point of floating their nominations seems to be to pile even more pressure on the Fed just in case Trump’s Twitter badgering, cable TV bullying, steak dinners and phone calls haven’t been sufficient. On Friday, Trump joined Moore and Kudlow in effectively demanding rate cuts and calling for the resumption of QE.

Why is all of that relevant? Well, because no matter what Powell or anybody else at the Fed says about their commitment to safeguarding the independence of US monetary policy, incessant attacks from the president do in fact erode that independence. For instance, even if you want to insist that Trump’s rhetoric had nothing to do with this year’s remarkable policy U-turn, it would be hard to argue that the president’s efforts to make Powell public enemy number one late last year didn’t have the effect of stoking fear in the market. That fear, to the extent it manifested itself in selling and widening credit spreads, in turn tightened financial conditions, effectively forcing the Fed to act. The point: One way or another, incessant public criticism can and will influence policy.

The fact that Trump called Powell on the phone early last month following a disappointing jobs report and amid the only “bad” week for US equities of 2019 is emblematic of just how proactive this president is prepared to be with regard to monetary policy. And none of the above is to say anything of all the times Trump has quite literally accused the Fed of harming America’s economic interests, which is just short of suggesting that the FOMC is actively engaged in subversion.

All of that matters – and it matters a lot. To the extent inflation remains any semblance of anchored and assuming the Fed can always find some excuse to be cautious vis-a-vis allusions to the external environment/international developments, you can expect the policy bent to be dovish from here.

Relive the March meeting

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‘Tightening Is So Last Year’: What Wall Street Thinks Of (Another) Dovish Surprise From The Fed

That, more than anything, is the context for the Fed’s predicament. This is all complicated immeasurably by the fact that Powell is tasked with presiding over a series of critical determinations about the balance sheet (e.g., when to end runoff, how to end runoff, what the appropriate size is going forward, what the composition should look like, whether to try and immediately reduce WAM in order to free up room for another Operation Twist later on down the road, etc. etc.).

When you throw in the fact that Powell is widely seen as having made a pretty grievous communications error in October and will be keen not to do anything like that ever again, the above suggests that the Fed will everywhere and always err on the side of caution unless the data unequivocally calls for hikes and the global economy somehow turns on a dime and inflects sharply to the upside. The market obviously agrees with that assessment.

“In our view, there is likely to be a clear consensus around the current policy path [and] we expect little disagreement in the current minutes about the economic outlook or appropriate near term policy”, Credit Suisse wrote Wednesday morning, previewing the March minutes, and adding that despite the broad consensus on the near-term path, “there may be some divergence on the committee about longer-term policy — in particular, about whether or not there is still a slight tightening bias.” Still, the bank states the obvious, which is that “Fed policy is in a holding pattern for now [and] there is a high threshold for further rate hikes.”

“Investors will look for the rationale behind the Fed’s 2019 median dot shift to no hikes from two hikes”, UBS says, dispensing with the obligatory before noting that “investors will also be looking to see if there are any details on the Fed’s balance sheet pause as well as if there are any hints towards the FOMC members lean towards certain balance sheet composition.”

For those who missed it, here is BofAML’s quick take:

We will look for answers on what factors led the majority of FOMC participants to rule out another rate hike in 2019. Many officials will likely point to the weaker trajectory of growth and inflation in their outlooks and argue that a shallower path of policy will allow them to sustain the current expansion and help them better achieve their goals. They will likely again highlight that the downside risks from slowing global growth and geopolitical factors (e.g. Brexit, USChina trade negotiations) allows the Committee to be patient and gives them an opportunity to pause and assess the state of the economy. That said, we will be curious to see if there were any discussions on what conditions would be necessary for the Committee to restart the rate hikes. Also, conversely, we will look for any hints on what conditions would warrant cuts in the policy rate. We suspect that significant deterioration in economic activity, major market volatility and/or further slowing in inflation could prompt the Committee to consider providing further accommodation. Comments since the March FOMC meeting suggests that the bar is relatively high for cuts but how the Committee weighs these risks could give further insight into their thinking.

For what it’s worth, here’s stocks and HY credit since the March Fed meeting:

And here’s 10-year yields (which of course plunged to their lowest since 2017 amid an acute growth scare and a positioning squeeze) along with the dollar which has been notoriously stubborn this year despite falling US yields and the dovish Fed.

So, there’s the backdrop/context and without further ado, here are the bullet point highlights from the March minutes as well as the full .pdf embedded below.

• “With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.”
• “Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments.”
• “Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year”
• “Several participants expressed concern that the yield curve for Treasury securities was now quite flat and noted that historical evidence suggested that an inverted yield curve could portend economic weakness;”
• “Several participants observed that the characterization of the Committee’s approach to monetary policy as ‘patient’ would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve.”
  • “A couple of participants noted that the ‘patient’ characterization should not be seen as limiting the Committee’s options for making policy adjustments when they are deemed appropriate.”
• “Participants also discussed alternative interpretations of subdued inflation pressures in current economic circumstances and the associated policy implications.”
• “Participants commented on a number of risks associated with their outlook for economic activity.”
• “A few participants noted that there remained a high level of uncertainty associated with international developments, including ongoing trade talks and Brexit deliberations, although a couple of participants remarked that the risks of adverse outcomes were somewhat lower than in anuary.”
• “Some participants suggested that, at future meetings, the Committee should discuss the potential benefits and costs of tools that might reduce reserve demand or support interest rate control.”
• “The Chair noted that he had asked the subcommittee on communications to consider ways to improve the information contained in the SEP and to improve communications regarding the role of the federal funds rate projections in the SEP as part of the policy process.”