The Fed released the Minutes of June 13-14 FOMC meeting today.
The minutes show an overreliance on regional report soft data and consumer confidence measures instead of hard data measures.
The Fed also firmed up its Balance Sheet Normalization Plans.
Staff Review of the Economic Situation
Total industrial production rose considerably in April, reflecting gains in manufacturing, mining, and utilities output. Automakers’ assembly schedules suggested that motor vehicle production would slow in subsequent months, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to modest gains in factory output over the near term.
[Mish Comment: The Fed relies on ISM and its own regional reports that have been entirely wrong for a year. It ignores Markit PMI data that has been reasonably accurate]
Real PCE rose solidly in April after increasing only modestly in the first quarter. Light motor vehicle sales picked up in April but then moved down somewhat in May. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were flat in May, but estimated increases in these components of sales for the previous two months were revised up.
[Mish Comment: This reflects upgrades to first quarter GDP and says nothing about the second quarter.]
In addition, recent readings on key factors that influence consumer spending pointed to further solid growth in total real PCE in the near term, including continued gains in employment, real disposable personal income, and households’ net worth. Moreover, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in May.
[Mish Comment: The Fed relies on what it believes the consumer will do rather than on what the consumer actually has done].
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the June FOMC meeting, real GDP growth was forecast to step up to a solid pace in the second quarter following its weak reading in the first quarter, primarily reflecting faster real PCE growth. On balance, the incoming data on aggregate spending were a little stronger than the staff had expected, and the forecast of real GDP growth for the current year was a bit higher than in the previous projection.
The staff saw the risks to the forecasts for real GDP and the unemployment rate as balanced; the staff’s assessment was that the downside risks associated with monetary policy not being well positioned to respond to adverse shocks had diminished since its previous forecast. The risks to the projection for inflation also were seen as roughly balanced.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.
As anticipated, growth in consumer spending seemed to have bounced back from a weak first quarter, and participants continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further.
[Mish Comment: It has?]
In light of surprisingly low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
[Mish Comment: The Fed has stressed the medium term term for how many years now? A Decade?]
Recent readings on headline and core PCE price inflation had come in lower than participants had expected. On a 12-month basis, headline PCE price inflation was running somewhat below the Committee’s 2 percent objective in April, partly because of factors that appeared to be transitory. Participants continued to expect that, as the effects of transitory factors waned and labor market conditions strengthened further, inflation would stabilize around the Committee’s 2 percent objective over the medium term.
[Mish Comment: And how long have things been transitory? The same decade?]
Several participants expressed confidence that a series of further increases in the federal funds rate in coming years, along the lines implied by the medians of the projections for the federal funds rate in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around the Committee’s 2 percent objective, especially as this tightening of monetary policy would affect the economy only with a lag and would start from a point at which policy was still accommodative. However, a few participants who supported an increase in the target range at the present meeting indicated that they were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections. These participants expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent.
[Mish Comment: Zero participants noted the complete absurdity of the 2% inflation target, the Fed’s inability to measure inflation, the fact that inflation benefits banks, the already wealthy, and the asset holders at the expense of everyone else.]
It was also suggested that the symmetry of the Committee’s inflation goal might be underscored if inflation modestly exceeded 2 percent for a time, as such an outcome would follow a long period in which inflation had undershot the 2 percent longer-term objective. Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn.
[Mish Comment: the Fed has not hit its own inflation estimates, inaccurately measured for over a decade. Yet, these clowns believe that a higher target in and of itself will actually do something.]
Normalization Plans
- For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
- For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
- The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
Fed’s Balance Sheet
Chart from the Fed’s Credit and Liquidity Programs and the Balance Sheet.
At $50 billion a month, it will take about 6 years at the estimated pace to get the Fed’s balance sheet to about where it was prior to the great recession.
Obviously, the Fed’s projection does not include the possibility of a recession, a significant economic downturn, or a reversal in policy for that entire duration
The Fed’s projection won’t happen. Indeed, it’s at best 50-50 the Fed even starts this year.
Mike “Mish” Shedlock
Agree with blog host (can’t use his name without comment going into moderation) about economy being very very weak, almost across the board.
Think the Fed will continue to normalize balance sheet and interest rates — because they have to, not because they want to. Protecting the politcal status quo is the Fed’s one true mandate, and takes precedence over everything else. The debt bubble is an existential threat, and the baby boomer’s pending retirement makes the threat imminent.
Boomers can’t borrow more (which would require working to repay said debt), and underemployed millenials living in their parents’ basement can’t take on their parents debts. Home equity (house price – mortgage) is way way way below historical trends — that won’t pay the debts either.
The baby boomers lived beyond their means, have little to no savings, and a social contract that says they can retire around 65 (or 67, not that this makes much difference). Individually, some of them might be credit worthy. But as a group, they are not good for their current debts, never mind trillions more.
Expecting the Fed to “go Japanese” is fighting the last war… and anyone looking at Japan knows they are losing their generational war with debt.
PS — the Fed doesn’t know what is going on — Yellen and Bernanke proved this beyond any doubt. But their puppeteers know that debt levels have become a threat to the system / status quo.
Pay down some debt or expect a LOT more Donald Trumps (and worse). The Fed can’t save the political system now.
Sounds like one BIG growth industry is going to be DOCTOR ASSISTED SUICIDES.
“The baby boomers lived beyond their means, have little to no savings, and a social contract that says they can retire around 65 (or 67, not that this makes much difference).”
When the iPhone came out, it was the young guys at work, who couldn’t wait to have one, at $600 a pop, not to mention the $100 a month phone bill that went with it.
It is the older guys who get downsized out of a job. There isn’t really a social contract in the corporate world. An older guy who was happy to continue contract maintenance on our companies videotape machines, was told by his company to take a buyout, or face a layoff, with no severance. Another older guy before him, previously got the same treatment.
It was Citibank that came up with the ad campaign, “you’ve got $25,000 (equity) hidden in your home.”
How many of the millions of jobs, depend on people living beyond their means? Yours, perhaps. Certainly, the people working in silicon valley do.
Whine all you want.
Then go look at the debt numbers. Look at the average balance of retirement accounts of baby boomers.
It is true many millenials have student loans, and no savings. But boomers did not have extortion level college costs (actually it was boomers that imposed said charges). And the millenials did not enjoy the pay raises that spiked in the 1980s. The millennials did not buy the McMansions, or fund every crock-pot UN sponsored anti-America non-profit they could start.
Face it Ron. When your parents were just about to retire, they had retirement accounts. They had equity in their house. The government had minimal off balance sheet debts, and strict limits on what stuff the government could stick its nose into (both domestically and abroad).
Boomers have no savings, no home equity, an out of control government that starts wars home and abroad — and you still have delusions of retirement paid for by somebody else.
I don’t know if the millennials will turn out good or bad; but baby boomers are the most selfish generation ever to exist in the USA.
Feel free to pay down at least some of the debt your generation accumulated while you were running the country. So far you have done nothing but increase debts and wreck companies (employers / taxpayers) that your parents built.
I don’t know if the millennials will turn out good or bad; but baby boomers are the most selfish generation ever to exist in the USA.
I would tend to agree with that.
Mish
in what way is the debt bubble an “existential threat”? A threat to the existence of what? Related to existentialism?
Society as currently constituted.
Agreed. Read earlier consumer spending down 9.7 % the only thing inflating is health care cost.
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The Fed deals in fictions (statistical abstractions) akin to fake news, and dodgy statistics and wobbly economic prognostications are small fictions compared to paper money fiat fakery. Like a Monarchy wielding Absolute Power, the Fed Banking Kings and Queens can at any time without accountability change the rules of the game. Like FDR in 1933, using gold (confiscation + upwards price adjustment) to devalue cash and paper currency and thereby immediately generate price inflation. Whenever it deems it can getaway with it, the Fed is free to do negative interest rates, higher interest rates, abolish paper money (cash), shrink the money supply, create unlimited fiat currency, etc. If helicopter money is insufficient, the Fed can do rocket money, nuclear money, QE on a double dose of steroids, or whatever they want to call it to devalue the currency and create price inflation.
All in the name of making debt and government forward liabilities (e.g. pensions, Medicaid, Social Security) easier to pay. Inflate or die is the declared policy, and an expedient political opiate. Thus, the 2% medium term inflation number is an extremely interesting and perhaps very meaningful Fed signal, as the Fed in one dramatic move as bold as FDR’s 1933 gold confiscation and currency devaluation can create a mini hyper-inflation event and then average it backwards to come out with whatever inflation number they want for the previous decade. For example, if the Fed wants 3% average inflation over a decade but inflation is only 1.5% per year, that 1.5% inflation shortfall per year (15% over 10 years) can be immediately corrected by one currency devaluation event of 15% (perhaps 20% allowing for compounding). So, why should the Fed worry? Fed members and staff can wrack up salary and pensions doing a decade of malarkey, and then do one big event to hit their one-decade central planning targets.
Reblogged this on World4Justice : NOW! Lobby Forum..
…normalize the balance sheet…. how quickly the spin gets absorbed. 🙂
FED can do anything? All those action do not occur without unintended consequences. The FED trapped, or actually has trapped itself.
Soft data can be manipulated massaged to look any way u want it,hard data not so much,and the fed along with big gov’t it’s all bout perception (propaganda)over reality,and as long as the checks from big gov’t arrives 1st of the month for the roughly 2/3 of the populous,it’s gonna stay that way (until it doesn’t)
Imminent war with North Korea will be sudden, brutish, and short. Targets are loaded into howitzers and missiles. Cleanup will be counter battery fires and air to ground. SEATO ground forces will maintain the defensive and exterminate any assembled NK ground forces. Have some investment cash on hand for the buy opportunity of a lifetime.
The “FED” is owned by the banks and only works for the banks. It is that SIMPLE!
The US consumer is tapped out.
No wage/earnings growth, but plenty of inflation in staples like food & shelter.
I’ve noticed a significant uptick in construction (mostly commercial/business expansion) which I believe was budgeted-for years ago but wasn’t going to be ‘spent’ while a socialist lived in the White House. Yes, business is political, too.
Once this brief construction surge is played out, the US economy will be ripe for a hard crash… no income growth, no capex, no career paths, no future (unless you’re a borg/robot).
Good Upshot article on hard vs. soft numbers. Who’d’ve guessed hard numbers reflect reality?
https://www.nytimes.com/2017/07/04/upshot/confidence-boomed-after-the-election-the-economy-hasnt.html
The simple fact is that people can’t spend that which is lining the pockets of Jamie Dimon.
“Several participants expressed confidence that a series of further increases in the federal funds rate in coming years, along the lines implied by the medians of the projections for the federal funds rate in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around the Committee’s 2 percent objective…”
In other words, a stopped clock is correct twice a day.
Stabilization simply does not exist, except for a moment in time in a cycle, which is why the FED never reached its objective. Until the cycle passes through 2%, the FED will never reach it. If the FED could maintain a 2% inflation rate, they would have done so already.
Full employment is another one of those stopped clocks that is right twice a day, or as such, once a business cycle.
We don’t need a FED, for a clock to be correct twice a day. The economy runs through a cycle naturally, all on its own.