Since the January FOMC statement, Janet has spoken twice and what seems like every Fed speaker has hit the headlines to explain their decisions (only to confuse the market more) leaving bonds and gold outperforming amid their clear confusion. The Minutes appear to confirm that confusion:
- *FOMC MEMBERS AGREED DATA TOO UNCLEAR TO GAUGE RISKS TO OUTLOOK (confused)
- *FED OFFICIALS CONTINUED TO EXPECT GRADUAL POLICY TIGHTENING (hawkish)
- *MANY FED OFFICIALS AT JAN. FOMC SAW INCREASED DOWNSIDE RISKS (dovish)
So The Fed was unanimous in its decision to leave rates unchanged, downgraded the economic outlook, and was fearful of the global financial volatility - which in the last 3 days has all been solved.
Stocks just managed to get back into the green since the January FOMC statement but bonds and bullion lead...
Further headlines:
- *A NUMBER OF FED OFFICIALS CONCERNED BY DRAG ON U.S. FROM CHINA (but you said it was irrelevent)
- *FED: OIL, USD LIKELY TO HOLD DOWN INFLATION FOR LONGER
- *MOST FED OFFICIALS SAW MODERATE U.S. GROWTH
- *FED OFFICIALS CONTINUED TO EXPECT GRADUAL POLICY TIGHTENING
- *FED OFFICIALS STRESSED TIMING AND PACE WOULD DEPEND ON DATA
Here are the key sections. On uncertainty and downside risks:
The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s as-sessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; the downside risks to the forecast of economic activity were seen as more pronounced than in December, mainly reflecting the greater uncertainty about global economic prospects and the financial mar-ket turbulence in the United States and abroad.
On employment:
Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemploy-ment rate as skewed to the upside.
On wage pressures:
In their comments on labor market conditions, participants cited strong employment gains, low levels of unemployment in their Districts, reports of shortages of workers in var-ious industries, or firming in wage increases. Most an-ticipated that employment would expand at a solid rate over the year ahead, although several saw the prospect of some moderation in employment gains from the par-ticularly large increases in the fourth quarter of 2015.
On inflation:
The risks to the projection for inflation were seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down and that the foreign exchange value of the dollar could rise substantially fur-ther, which would put downward pressure on inflation.
On China, which if you will recall the Fed spent most of 2015 assuring anyone who listened would not be a risk factor:
Regarding the foreign economic outlook, it was noted that the slowdown in China’s industrial sector and the decline in global commodity prices could restrain eco-nomic activity in the EMEs and other commodity- producing countries for some time. Participants dis-cussed recent developments in China, including the pos-sibility that structural changes and financial imbalances in the Chinese economy might lead to a sharper deceler-ation in economic growth in that country than was gen-erally anticipated. Such a downshift, if it occurred, could increase the economic and financial stresses on other EMEs and on commodity producers, including Canada and Mexico. Moreover, global financial markets could continue to be affected by uncertainty about China’s ex-change rate regime. While the exposure of the United States to the Chinese economy through direct trade ties was limited, a number of participants were concerned about the potential drag on the U.S. economy from the broader effects of a greater-than-expected slowdown in China and other EMEs.
On financial conditions:
Domestic financial conditions tightened over the inter-meeting period, as turmoil in Chinese financial markets and lower oil prices contributed to concerns about prospects for global economic growth and a pullback from risky assets. The increased reluctance to hold risky assets was associated with a sharp decline in equity prices and a notable widening in risk spreads on corporate bonds. Treasury yields declined across maturities, reflecting a downward revision in the expected path of the federal funds rate and likely some increase in safe-haven de-mands amid the market turbulence. The dollar appreci-ated against most foreign currencies.
On markets:
Broad U.S. equity price indexes declined sharply over the intermeeting period, exhibiting a high correlation with movements in crude oil prices and foreign equity in-dexes. Domestic equity indexes were quite volatile in January, and one-month-ahead option-implied volatility on the S&P 500 index climbed to the upper end of its range of the past few years. Spreads on corporate bonds over comparable-maturity Treasury securities widened over the intermeeting period, reportedly reflecting in-creased concerns about corporate credit quality, particu-larly in the energy sector, and a decline in investors’ will-ingness to assume risk.
* * *
A quick take by Bloomberg,
Federal Reserve policy makers debating their outlook for interest rates last month expressed concern that the fall in commodity prices and the rout in financial markets increasingly posed risks to the U.S. economy.
“Participants judged that the overall implications of these developments for the outlook for domestic economic activity was unclear but they agreed that uncertainty had increased,” according to minutes of the Federal Open Market Committee’s Jan. 26-27 meeting released Wednesday in Washington. “Many saw these developments as increasing the downside risks to the outlook.”
Policy makers, who projected in December that they’d raise interest rates four times this year, are grappling with the fallout of market turbulence that has cast doubt over the economic outlook globally. Fed Chair Janet Yellen suggested in congressional testimony last week that the central bank could delay its plans for tighter policy to assess how the economy reacts to current headwinds.
The minutes go into more detail than the FOMC’s statement on policy makers’ concerns about the risks to the U.S. economy. While voting members “generally agreed” they couldn’t assess the balance of risks to the outlook in the statement, officials “observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,” according to the report.
Another part of the minutes indicated that a minority of policy makers judged that recent developments had “increased the level of downside risks or that the risks were no longer balanced.”
To sum it all up...
FOMC Minutes: The Fed didn't provide an economic assessment in January because they're as puzzled as all of you.
— Binyamin Appelbaum (@BCAppelbaum) February 17, 2016
The full minutes below (link):http://www.scribd.com/embeds/299583404/content