Today the Fed released Minutes of its July 26-27 FOMC Meeting.
I counted 17 instances of words beginning with “uncertain”.
In regards to rate hikes, the minutes show “The median respondents to the Desk’s Survey of Primary Dealers and Survey of Market Participants saw one rate hike in 2016 as most likely, the same as in the June surveys.”
In January, the median expectation was for three hikes.
I counted precisely one use of the word “hike”. Nonetheless, let’s take a look at today’s headlines.
- Wall Street Journal: Fed’s July Minutes Show a Split Central Bank Seeking to Keep Options Open
- CNN Money: Fed Officials Talk Up Rate Hike in 2016
- BBC: Federal Reserve Split on Timing of Next Rate Rise
- Bloomberg: Gold Advances as Fed Split on Whether Rate Hike Needed Soon
- MarketWatch: The central bank that cried wolf? Talk of higher U.S. interest rates is often just that.
Spotlight on “Rate”
There were so many instances of “rate” that I had to load the document into Word to count them.
Word counted 121 instances. However, included in that count are some things like unemployment rate, “generate”, “moderate”, and “corporate”.
Here two snips of the word in proper context of interest rate policy by the Fed (not other central banks).
- The Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants indicated that the median responses for the most likely path of the federal funds rate over coming quarters had declined.
- The median respondents to the Desk’s Survey of Primary Dealers and Survey of Market Participants saw one rate hike in 2016 as most likely, the same as in the June surveys.
In one big paragraph towards the end of the meeting minutes, Fed participants pontificate about hikes.
Against the backdrop of their views of the economic outlook, participants discussed the conditions that could warrant taking another step in removing monetary policy accommodation. With inflation continuing to run below the Committee’s 2 percent objective, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labor market and whether inflation was continuing to rise gradually to 2 percent as expected. Several suggested that the Committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis. In addition, although near-term downside risks to the outlook had diminished over the intermeeting period, some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. These participants concluded that the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand. However, some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the Committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting. A few participants pointed out that various benchmarks for assessing the appropriate stance of monetary policy supported taking another step in removing policy accommodation. A few also emphasized the risk to the economic expansion that would be associated with allowing labor market conditions to tighten to an extent that could lead to an unwanted buildup of inflation pressures and thus eventually require a rapid increase in the federal funds rate. In addition, several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.
Overlapping Ideas
Overlaps are a big problem with analyzing that massive paragraph. Some, several, these, they, some other, and few could represent seven groups or three.
Most likely there are 3 camps as follows
- Yes
- No
- I have no idea, so let’s wait and see
Moving Target
That was the thought process as of July 27. Where everyone stands now is more of a mystery.
Since the meeting, we have seen another good jobs report but plenty of weak data as well.
Intensifying Incentives for Investors
In the “Duh!” category we find this statement: “several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.”
It’s safe to say the Fed has already blown a massive bubble. And if the stock market corrects hard, will the Fed really hike?
Market Odds Before Minutes
Market Odds After Minutes
The September rate hike odds are 18% and were 15% yesterday. Unless the Fed can convince the market a rate hike is on the table for September, the Fed will not hike.
Lots of things can happen between now and September and then between September and the following meeting in November.
One more bad jobs report will shift any discussion of hikes to December at the earliest, and more likely back to mid-2017.
Mike “Mish” Shedlock
To admit there is a bubble
means
“doing something” about it.
“Doing something” about
means
likely popping it … and taking all the criticism for ending the party.
Self preservation
means
pulling a Sgt Schultz … and stand ready with broom and dust pan.
…
What “wonderful” leaders we have.
Agree 100%. They will not raise until they get permission. This won’t happen until someone figures out how to front-run the effects for massive gains. Then a new theory will see the light of day that says higher rates make good sense. The Fed will dutifully follow instructions and raise rates.
http://charts.stocktwits.com/production/original_46865512.jpg?1450232600
By this time, at these low rates, wouldn’t everyone have borrowed the maximum amount they could handle payments for. A rate cut wouldn’t have much effect since income would not be enough to pay principle on additional borrowing. A rate increase would not decrease investment since max already borrowed and need for additional borrowing already constrained by limits on income to pay back earlier loans.
Why doesn’t the FED just cancel meetings and just get together to enjoy some good food and golf for a while. Send the press a standard press release saying no changes to rates till we meet again.
The FED has to lower rates for holdouts like me who don’t like to borrow.
So far this year, China, Japan, France, Brazil and Colombia have lead the selloff of 192 billion dollars of Us treasuries from their reserves. Get out the decision dart board?
“Overlaps are a big problem with analyzing that massive paragraph.”
The other big problem is wasting even one minute of the limited number minutes you have to live on this planet “analyzing” this type of gobbledygook nonsense.
That being said: The plane is the same as i have stated repeatedly.
September = off the table, no action
December = rate hike if Trump wins, in order to sink the market. No action if we end up with a 3rd Obama term.
Book It!
God I wish this WordPress thing would allow comment editing. Ugh!
I have submitted that request
“Uncertainty” is the new “unexpectedly”…
perceptible to the general public. Is that in the public interest, or even in the interests of USA.gov? It is clearly not in the interests of the banks, since loans will be repaid with devalued currency and the banks will therefore over time become less viable or worthless as businesses.
Why do the banks put up with it, since over time the policy is sinking the banks along with pension funds and individual savers. Strange that the Fed, a regional conglomeration of banks, is working against the best interests of its member banks and against the best interests of the majority of the USA. As a regional organization representing bankers, is the main benefit of being in the Fed now a guaranteed bailout under the federal government’s too-big-to-fail and TARP policies? Of course, bank CEOs know that they will be richly rewarded even as the banks they head become less viable as businesses. Effectively, the bank CEOS are being richly paid to let the banks they run become nationalized, as the banks are now just policy pawns waging war on behalf or USA.gov against their customers (i.e. zero/neg interest rates, the war on cash).
Unfortunately, I could not edit the post in WordPress, and a line at the top was cut off…But will try to delete my original post.
The Fed mission is to devalue the dollar (2% inflation) at a gradual rate not perceptible to the general public. Is that in the public interest, or even in the interests of USA.gov? It is clearly not in the interests of the banks, since loans will be repaid with devalued currency and the banks will therefore over time become less viable or worthless as businesses.
Why do the banks put up with it, since over time the policy is sinking the banks along with pension funds and individual savers. Strange that the Fed, a regional conglomeration of banks, is working against the best interests of its member banks and against the best interests of the majority of the USA. As a regional organization representing bankers, is the main benefit of being in the Fed now a guaranteed bailout under the federal government’s too-big-to-fail and TARP policies? Of course, bank CEOs know that they will be richly rewarded even as the banks they head become less viable as businesses. Effectively, the bank CEOS are being richly paid to let the banks they run become nationalized, as the banks are now just policy pawns waging war on behalf or USA.gov against their customers (i.e. zero/neg interest rates, the war on cash).
A “normal” Fed has two mandates: full employment and sound money. Contrary to intellectual opinion they are not mutually exclusive. Ask yourself this: how can Saudi Arabia, Nigeria, Venezuela, Russia, Brazil, South Africa, etc etc be so rich (oil, gold, God, diamonds, Unubtanium, etc) and be so poor? And the answer is none of them take sound money seriously. This includes the USA, Canada, Britain, Europe…no one on this entire Planet has ever seen a problem that can’t be solved by and I quote Ben Bernanke”the Printing Press.”
Case in point: Nuero-mama…a Penny stock but a few short years ago…now worth an INCREDIBLE 36 (56?) BILLION so called “dollars.” No revenue, no profits, no assets, no SEC reports going back 2 plus years…meaning this Company upon which your Government depends on for paying the bills…and many like it actually…are literally hallucinations on your computer screen.
Sounds funny at first…and then the “next bill comes due” for your B-21 Bomber….and that’s not 500 million for one but 500 BILLION for one…
Never heard of “Nuero-mama,” but sounds like one powerful hallucinogen if it can conjure up half trillion dollar B-21 bombers out of thin air. Makes “sound money” a tough sell, in comparison. “Let’s go get stoned” sounds like a rational nation-state response to such a powerful hallucinogenic specie, as long as the dreamtime lasts (could be decades; shows little sign of wearing off). Screw reality.
I wonder, should we blame it on Gutenberg and the printing press? If Gutenberg were alive today, he would no doubt be printing 500 euro notes, or perhaps trillion euro notes for more convenient storage in a negative interest rate environment. Little did he suspect that the printing press was good for more than bibles, books and brochures; he was pre-John Law.
Perhaps the plan is to do nothing until the November elections are over. Until then, toss sand into the air to keep everyone distracted and confused but make no changes. You don’t need to believe in a conspiracy at the Fed to accept that theory, just groupthink, which appears to be available in abundant quantity.
“Unless the Fed can convince the market a rate hike is on the table for September, the Fed will not hike.”
The FED can’t convince the market as they keep talking out both sides of their mouth.
The market should know by now that it will be after the USA presidential election, making mid-Nov. and Dec. the nearest possibilities. Perhaps it is already priced into stock prices as not being that big a deal, or even a small positive; or as one of the least worst places to be?
I post comments occasionally in the NYT. They rejected a comment I made about Central Banks monetizing the stock market a while back in reference to a Krugman article about stock market valuation. I’m assuming they did this because they considered the notion utterly preposterous. We now know that Central Banks are the biggest buyers of stocks. Some like the BOJ and Swiss Central Bank buy stocks directly, while others buy the bonds of companies who use the money for buyback. Central Banks have monetized bonds and now they have monetized stocks. The stocks they buy directly will never be sold just like the bonds they buy will be allowed to run off to maturity. No losses will ever be recognized on any of these purchases. The Chinese were the first buy stocks directly when their market crashed 18 months ago and now this is an accepted model world wide.
To me, this is a “hair on fire” moment because now stocks can never go down, ever. Stocks have become autonomous; they drive themselves. No valuation model has any value. Central Banks have infinite resources and they are committed to propping up the market at any cost.
Why in the hell is no one talking about this nonstop? We now live in a command control economy, for Christ sakes. All the endless talk about market forces and analysis is nothing but a absurd lie. What are consequences of this experiment? Didn’t John Law destroy the French economy for 100 years with a similar experiment?
The Fed talk of raising rates is a pathetic joke. So much bluster that means nothing.
You can see the flop sweat on the Fed governors faces.
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@Mish, Notepad++ returns a count of 63 for the regular expression \brate\b which excludes words containing rate such as generate. \b is a regex metacharacter indicating a word boudary.
@Mish, word boundary not boudary 🙂
We’re all focused on whether or not the FED will raise rates a token 0.25%. The real question is whether or not the FED will ever normalize rates. The obvious answer is they can never normalize rates, so a token rate rise that may be quickly reversed is not worth pondering about.
@Mish, just realized you likely counted rates as well as rate which brings the count up to 97. The regex pattern would then be \brates?\b. The s? effectively means the s is optional.
In a quick search I haven’t found a graph of rate hike odds vs actual rate hikes. It’s probably because it would look rather boring since I suspect the odds line would look like a seismograph trace during an earthquake, but there’d be only one small blip to mark the rate hike over a period of 7 or 8 years. However, it would be something to laugh and shake heads at, so it would serve as some comic/cynic relief.