‘Upcoming Meetings’

Ostensibly, traders had good reason to parse the April Fed minutes.

After all, the US economy is at an “inflection point” (as Jerome Powell is fond of putting it) and even before last week’s flaming-hot CPI print, there were burning questions about when policymakers would be compelled to admit that “further progress” towards the FOMC’s goals had surely been made, semantic debates about the meaning of the word “substantial” notwithstanding.

But April’s CPI report effectively rendered every conversation that happened prior to its release stale and quite possibly irrelevant. Until Wednesday’s crypto drama, all anyone wanted to talk about was inflation, for obvious reasons (figure below).

The minutes of the Fed’s last meeting thus needed to be reverse engineered, if you will, to incorporate recent events. I’m not sure that’s a particularly useful exercise, especially considering the extent to which Powell’s decision to hold a press conference after every meeting removed some of the mystique around the minutes. And besides, you hear from a Fed official almost every, single business day and sometimes on Sundays too, depending on if Neel Kashkari is in the mood to make the TV rounds.

Whatever the case, the April minutes featured the word “goals” 18 times and it won’t surprise you to learn that “participants generally noted that the economy remained far from the Committee’s maximum-employment and price-stability goals.”

Paradoxically (and perversely, if you count yourself a member of the “Main Street” club) the further away from those goals the economy is, the better for asset prices, as long as the distance isn’t enough to stoke fears of another recession.

Indeed, the reason markets are so concerned with acute price pressures isn’t that unmoored inflation could create misery across the economy, but rather the prospect that a price spike could bring forward the taper discussion. And lord knows we can’t have that (figure below).

I preemptively chided finance-focused social media (last weekend) for the painfully predictable jokes which were invariably rolled out on Wednesday afternoon juxtaposing excerpts from the April minutes with last week’s inflation print.

While I don’t want to land myself in the same company I criticized, I’d be remiss not to flag the following passage as particularly amusing when set against the deluge of evidence to suggest expectations are now manifesting in realized inflation:

In particular, some participants emphasized that an important feature of the outcome-based guidance was that policy would be set based on observed progress toward the Committee’s goals, not on uncertain economic forecasts. However, a couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction.

I think it’s fair to say that inflation pressures are “sufficiently evident.” It’s not just market-derived inflation premia and it’s not just “uncertain forecasts” from economists, either. It’s actual, real inflation. The question is: For how long?

The word “progress” featured 22 times in the April minutes, the word “inflation” 55 times.

The word “various” was inserted to describe the number of participants who said “it would likely be some time until the economy had made substantial further progress” towards the Fed’s goals. That may hint at a bit less in the way of unanimity. We know Robert Kaplan doesn’t think the taper discussion should wait much longer, for example.

The market seemed particularly upset by a passage that said “a number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

That might be described as the most overt nod to an imminent taper discussion yet, and it sparked a flurry of action in Treasurys. “Around 50k 10-year note futures traded in three-minute window on a down-trade while 10-year yields rose as high as 1.6847%,” Bloomberg’s Edward Bolingbroke noted. The curve steepened and Eurodollars showed 20bps of tightening by the end of next year.

Although the minutes reiterated how important it is that the Committee “clearly communicat[e] its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases,” the mention of “upcoming meetings” was enough to spook traders.

It’s not difficult to posit that Jackson Hole and/or September are in play when it comes to telegraphing a taper, especially if the inflation data continues to come in hot.

Of course, any additional softness in monthly payrolls could offset the sense of urgency, but such a scenario (i.e., relatively lackluster employment numbers versus persistently hot inflation data) isn’t ideal.

April Fed minutes