The Fed minutes confirm a healthy debate ..... but don't tell us anything we didn't already
The Fed minutes confirm a healthy debate ..... but don't tell us anything we didn't already know.
ref : "Fed Sees Balance-Sheet Move Soon as Inflation Debate Heats Up" , Bloomberg Markets
There's a problem with the modern-day practice, necessity even, of examining every word and punctuation mark uttered or published by central banks for startling new insights into future policy ..... it's all a bit of an anticlimax when there aren't any. Let's face it, there generally aren't and one could argue that if the market had found anything truly revelatory in the minutes of the Federal Reserve's policy meeting held over three weeks ago, then something must have gone amiss with lines of communication.
Still, that doesn't mean that it's not helpful to receive an official narrative of the level of debate between the powers-that-be, even if it's not exactly news. In a sense there's something for everybody in yesterday's release, in that opinions veering towards both the hawkish and the doveish tendencies were represented.
Back in June, the Fed indicated that they would look to hike the benchmark lending rate one more time this year, almost certainly in December, to a range of 1.25 - 1.50%. It seemed a perfectly reasonable intention, all things being equal. The trouble is, whilst growth remains solid and unemployment numbers tumble, that strength has not resulted in the kind of upward pressure on wages and therefore inflation that conventional economic theory teaches us to expect. The Fed may still profess to wanting one more rate rise this year, but the market is no longer confident that they'll be able to deliver it.
Stubbornly low inflation is not just an issue in the United States, and the Fed is by no means the only central bank for whom it's a source of debate. We already know this really, but it's interesting to see how much the official minutes reveal. They tell us that :
A majority of the Federal Open Market Committee (the decision-makers) have stuck with the belief that inflation would gradually rise to the 2% target over the medium term. At the same time, "many" concede that inflation may take longer to hit target levels than currently forecast. In the current circumstances, one might suggest that acknowledging such a possibility is hardly going out on a limb but "several" members went further, suggesting that even at these low levels the risks to the inflation outlook could be to the downside.
Then there's the other side : "some other" participants are worried that the cocktail of easy financial conditions and tight labour markets could, sooner or later, result in an "overshooting" of the the 2% inflation target that might be painful and costly to reverse. These more hawkish souls continue to warn against "a delay in gradually removing policy accommodation".
The minutes are deliberately vague about numbers of course, but on balance you'd have to conclude that the Fed is ready to put in another hike this year .... but only if inflation data starts behaving itself. And right now, that's a significant "if" ....
The other topic that investors were keen to hear more about was when exactly the Fed might begin to shrink it's balance sheet -- in other words, to enact the plan to allow US Treasuries and mortgaged-backed securities accumulated through the QE bond-purchasing programme to roll off as they mature without being replaced. Apparently several members were prepared to announce a date at that July meeting, but most preferred to "defer the decision until an upcoming meeting". We have to assume that the Fed's next meeting on Sept 19-20 will see an announcement on that front.
Also worth noting in the minutes were :
The Fed raising its assessment of financial stability risks to "elevated" from "notable" (it's all about nuance !) -- plainly, enormously high stock market valuations have got the Fed's attention, though "a couple" of members argued that they were supported by macroeconomic factors.
Questions being asked as to the inflation framework used by Fed -- essentially, if it requires employment and growth rates to be at levels unlikely to be sustainable in the long-term in order to achieve your desired rate of inflation, how sustainable is the model itself ? Good question ..... "most participants thought the framework remained valid", however. Phew, that's a relief ....
The market has been keenly awaiting some direction from the ECB as to when they might start reining back their own QE programme, given the much-improved economic outlook in the Eurozone. ECB boss Mario Draghi laid out the foundations for implementing QE at the annual Jackson Hole get-together of the great and the good back in 2014. This has led to considerable speculation that he might use next week's rendezvous to put us all in the picture once more.
Reuters, quoting two sources, tell us that is definitely not the case. For starters, Mr Draghi still carries the bruises of his speech in Sintra, Portugal, that was taken to be a lot more hawkish than he obviously intended. Secondly, and partly as a result of that Sintra episode, it's thought anything that could be construed as as a statement of ECB policy is best left to official ECB meetings. And last but certainly not least, the doves at the ECB are even more nervous about acting prematurely, and concerned about low inflation, than the doves at the Fed.
So, no revelations in the Rockies, then ......