To be sure, the January Fed minutes were stale.
Quite a bit transpired since last month’s policy meeting. Inflation printed another upside surprise and the details suggested price pressures continued to broaden out. PPI data released a few days later told largely the same story. The CPI figures were a bridge too far for Jim Bullard, who had a come-to-Jesus moment last Thursday. He told the financial universe all about it, first during an interview with Bloomberg and then, a few days later, in remarks to CNBC’s Steve Liesman.
Bullard’s initial comments prompted a severe reaction in rates, where traders briefly assigned relatively high odds to an inter-meeting, emergency rate hike. Although that was an easy fade, Bullard’s rhetoric left a mark. At least one official is very anxious.
Mercifully for equities, the January minutes were devoid of landmines. In fact, some of the language might be construed as incrementally dovish, if only when juxtaposed with what, by now, is an extremely hawkish zeitgeist. At the least, there was nothing new in the account of the proceedings.
“[R]isks to the baseline projection for economic activity were skewed to the downside and… risks to the inflation projection were skewed to the upside,” the minutes said. That’s bad, but analysts and market participants have spent the last three weeks obsessing over the prospect of a worsening growth-inflation mix. It may not be fully priced into equities, but the curve knows it.
There was nothing like confirmation of a 50bps March liftoff. “If inflation does not move down as expect[ed], it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate,” the minutes read. Hardly a ringing endorsement of the Bullard view. Although the data received over the past several weeks arguably makes Bullard’s case, so far his colleagues have been reluctant to commit to anything like his preferred timeline for going from zero to 100bps — “real quick,” as the song says.
Most officials agree that a faster pace of rate increases is warranted compared to 2015, the minutes “revealed.” Hardly news. In fact, Jerome Powell overemphasized that point in the press conference, pressuring equities in the process. It’s well socialized.
As for balance sheet runoff, details were sparse. “Many participants commented that sales of agency MBS or reinvesting some portion of principal payments received from agency MBS into Treasury securities may be appropriate at some point in the future,” read one notable passage. The “at some point” language indicates the Fed doesn’t intend to be an active seller of anything at the outset. It’s almost surely the case that the Committee would prefer to roll principal payments into Treasurys first.
All in all, the minutes were pretty nebulous. And that was (more than) fine with stocks, which this week are tasked with pricing a reaction function even more opaque than that of a panicked Fed — that of Vladimir Putin.
US shares ended Wednesday’s session flat which, again, is a decent outcome, all things considered. “The notion that the two-year sector reached its upper bound at 1.64% on the extremes of the 50bps rhetoric/speculation continues to resonate,” BMO’s Ian Lyngen and Ben Jeffery said, on Wednesday afternoon, adding that “with two-year yields dipping below 1.50% following the Minutes release and the January 2023 fed funds futures contract at 163bps, the market is now drifting back toward a more pedestrian hiking cycle with six hikes this year.”
As I put it last week, the front-end theatrics around Bullard and January CPI were an easy fade, even if they weren’t easily forgotten. Wednesday’s bull steepener was a welcome development. As Bloomberg’s Edward Bolingbroke noted, swaps saw some of the hike premium come out, with 36bps now priced for March and 158bps for 2022. Things are slowly coming off the proverbial boil.
“There is a convergence towards a consensus that rate hikes should have already been in full swing and that the Fed is behind the curve [but] markets have abdicated on any long-term predictions — they find probability assignment to different long-term outcomes out of grasp and the level of uncertainty unmanageable,” Deutsche Bank’s Aleksandar Kocic said.
“Instead, they have become content with risk managing Fed actions and have refocused on tagging along with short-term expectation of policy rate,” Kocic added, noting that “markets seem to remain aware of their past failures to forecast rates together with systematic biases of the post-2008 QE period and, in an attempt to incorporate the past errors into its decisions, long-end yields continue to be compressed [while] rates action remains concentrated to the front end of the curve, which undergoes aggressive revisions.”
There wasn’t much left to say about Wednesday’s US session. Retail sales beat, there are still more questions than answers on the geopolitical front and the Fed is poised to tighten policy, only nobody knows by how much or how fast.
I’d like to tell you some sort of resolution is forthcoming, but that’d be a lie.
At this point, we’re all data dependent.