Fed Minutes Underscore ‘Transitory’ Narrative, ‘Patient’ Approach

Fed Minutes Underscore ‘Transitory’ Narrative, ‘Patient’ Approach

It’ll be tempting to write off the May Fed minutes as a bit stale.

After all, the trade narrative has completely changed since Jerome Powell managed to turn a dovish statement into a hawkish lean with another one of his signature “plain English” press conferences.

Traders will parse the meeting account for clues about the consensus around Powell’s “transitory” characterization of the factors weighing on inflation — especially in light of cooler-than-expected reads on wage growth and CPI.

The evolution (or maybe “devolution” is better) of the macro backdrop notwithstanding, Nomura’s Charlie McElligott notes that the minutes “could actually be relevant to Rates and Equities today” given the “potential to update Chair Powell’s ‘transitory’ inflation weakness commentary.”

As Charlie wrote Wednesday morning, any “reiteration of this view would be ‘less dovish’ than market expectations and could drive a Flattening of the curve.”

Additionally, we’ll potentially get some manner of clarity/update on the balance sheet normalization plan including, perhaps, a bit of sparse color on the Fed’s thinking regarding the longer-term composition. Markets will also be keen to know if there was any substantial discussion of a standing repo facility beyond what Powell mentioned in the press conference (which wasn’t much). “Anything tangible [on that] would be bullish for risk assets, on the perception of easier liquidity”, McElligott mused.

“The FOMC minutes should confirm the Fed’s ‘patience’ [and] we expect the discussion to reflect the upbeat tone in the statement and the market will be watching whether the view of softness in core inflation being driven by transitory factors is widely shared between members”, Barclays wrote Sunday, adding that “if most of the members express the same opinion towards the weakness in inflation, it is likely to sound hawkish, but recent inflation data show some concern about the dominance of the transitory factor and the minutes could be discounted by markets.”

“We will look for discussions around the Fed’s balance sheet [as] we suspect there were discussions around the maturity structure of the Fed’s portfolio and some officials’ desire to shorten the average duration of assets on its balance sheet similar to the structure prior to the financial crisis”, BofA said, in some perfunctory commentary out late last week. “Additionally, we will read for any new insight into the ceiling tools and the Fed’s decisions to cut IOER by 5bps.”

Again, all of that will sound dated given what’s happened on the trade front. The tariff escalation and the distinct possibility of duties on the remainder of Chinese exports to America could ultimately drive consumer prices higher and dent growth, putting the Fed in a no-win situation. Meanwhile, rate cut bets continue to be pressed.

You can be sure Donald Trump will not be pleased if there’s any kind of hawkish interpretation that weighs further on stocks, which are headed for their first three-week losing streak since December.

10-year yields are obviously shouting something about growth concerns and the discrepancy between equities and bonds is a bit disconcerting.

Bullet points from the minutes can be found below, but we would note that on a first read, these appear broadly neutral. “Patience” is reiterated and “many participants” shared the view that the factors weighing down inflation are transient.

Notably, it looks like they went out of their way to emphasize that policy will remain on hold “even if” the outlook for global growth improves and financial conditions loosen. That’s dovish at the margins, although not necessarily “new”.

There was some concern among “several participants” that ongoing weakness in inflation (if it persists over another couple of quarters) could be a problem. This is to be expected. Indeed, this is why the Fed is reviewing its inflation framework and why many suspect a new approach is coming next year.

The bolded bit below about risks having “moderated” is antiquated – period. Trade tensions are back and Brexit took another turn for the absurd this week.

Analysts will doubtlessly parse the bolded color below about the prospect of shortening WAM. This is something that’s been top of mind all year. That said, the final bolded passages below suggest a decision on the longer-run composition of the balance sheet isn’t imminent and could ultimately coincide with the results of the ongoing policy review.

  • “Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”
  • Many participants viewed the recent dip in PCE inflation as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”
  • “Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee’s symmetric 2 percent objective–a development that could make it more difficult to achieve the 2 percent inflation objective on a sustainable basis over the longer run.”
  • “A number of participants observed that some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated, including those related to the global economic outlook, Brexit, and trade negotiations.”
  • “Participants noted that even if global economic and financial conditions continued to improve, a patient approach would likely remain warranted, especially in an environment of continued moderate economic growth and muted inflation pressures.”
  • “The staff presented two illustrative scenarios as a way of highlighting a range of implications of different long-run target portfolio compositions.”
    • “In the first scenario, the maturity composition of the U.S. Treasury securities in the target portfolio was similar to that of the universe of currently outstanding U.S. Treasury securities (a “proportional” portfolio).”
    • “In the second, the target portfolio contained only shorter-term securities with maturities of three years or less (a “shorter maturity” portfolio).”
    • “Based on the staff’s standard modeling framework, all else equal, a move to the illustrative shorter maturity portfolio would put significant upward pressure on term premiums and imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes as in the baseline outlook.”
  • “Several participants expressed the view that a decision regarding the long-run composition of the portfolio would not need to be made for some time, and a couple of participants highlighted the importance of making such a decision in the context of the ongoing review of the Federal Reserve’s monetary policy strategies, tools, and communications practices.”

Full minutes


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