Since the last FOMC meeting on Sept 16th, gold has been the biggest loser while the USD managed modest gains…
Of course, the very modest gain in stocks was thanks to a huge short-squeeze…
Interestingly, despite The Fed promising that rates are on hold for pretty much ever, the market’s expectations for Dec 2021 have shifted hawkishly higher…
And real yields have risen significantly…
As we noted earlier, while the Minutes will likely reinforce the recent run of Fed commentary (more fiscal stimulus needed, uncertainties ahead, rates not going anywhere any time soon, etc) the market will be paying particular attention to any remarks on the Fed’s QE purchases, especially since the chances of fiscal help (and thus Treasury supply that would need to be monetized by The Fed) has all but evaporated.
Also, as a reminder, the meeting was unusually contentious with two dissents (one dovish – Kashkari, one hawkish – Kaplan).
One critical item in these minutes will be to see how reliant the Fed’s forecasts were on fiscal stimulus given the news in the last 24 hours on that front.
Reaffirming the lower-forever rates forecast, minutes show Fed officials laid out a three-part test that must be met before they consider lifting short-term rates from near zero.
First, they need to be satisfied that labor-market conditions meet their maximum employment goals, which weren’t spelled out.
Second, inflation must reach 2%.
Third, they will need some evidence—from forecasts or market-based measures—that inflation will continue to run moderately above 2%.
So essentially the “no change until at least 2023” takeaway that most had from the Fed decision last month isn’t set in stone.
“Participants generally noted that outcome-based forward guidance for the federal funds rate of this type was not an unconditional commitment to a particular path. Indeed, outcome-based guidance of this type would allow the public to infer changes in the Committee’s assessment of how long the target range for the federal funds rate would remain at its current setting.”
Additionally, and most notably, given ZIRP forever, some participants also noted that in future meetings it would be appropriate to further assess and communicate how the Committee’s asset purchase program could best support the achievement of the Committee’s maximum employment and price-stability goals.
Regarding asset purchases, participants judged that it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace. These actions would continue to help sustain smooth market functioning and would continue to help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Most ominously, Fed staff and many officials forecasts did indeed assume some more fiscal aid in 2020.
The staff’s forecast assumed the enactment of some additional fiscal policy support this year; without that additional policy action, the pace of the economic recovery would likely be slower.
On bubble fears:
“a couple of participants indicated that highly accommodative financial market conditions could lead to excessive risk-taking and to a buildup of financial imbalances.”
With regard to COVID:
“In the staff’s medium-term projection, the baseline assumptions included that the current restrictions on social interactions and business operations, along with voluntary social distancing by individuals and firms, would ease gradually through next year.“
“While the outlook for inflation was viewed as highly uncertain, a number of participants projected that inflation would run below the Committee’s 2 percent longer-run objective for a significant period before moving moderately above 2 percent for some time—consistent with the Committee’s revised consensus statement.
Participants still generally judged that the overall effect of the pandemic on prices was disinflationary.”
And finally, The Fed discovers the perils of ‘reflexivity’:
“Information pointing to a weaker outlook for the economy and inflation would tend to lead to public expectations for a longer period at the current setting of the target range while information suggesting a stronger outlook for the economy and inflation would tend to lead to expectations for a shorter period at the current setting.”
* * *
Full FOMC Minutes below: