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.
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
- I have no idea, so let’s wait and see
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