With a dumping dollar and collapsing yield curve since November's FOMC, all eyes are on the Minutes for any signals of The Fed hawkishly ignoring inflation concerns but instead a few Fed officials opposed near-term hikes (on the basis of weak inflation). Furthermore, several Fed officials warned of the potential for bubbles, "in light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances."
Bloomberg's Brendan Murray highlights the key aspects of The Fed Minutes
Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged. Nearly all participants reaffirmed the view that a gradual approach to increasing the target range was likely to promote the Committee’s objectives of maximum employment and price stability.
A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective.
Several participants indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee’s objective. A few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee’s commitment to its longer-run inflation objective.
In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy.
Several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years.
With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall. Many participants judged that the economy was operating at or above full employment and anticipated that the labor market would tighten somewhat further in the near term, as GDP was expected to grow at a pace exceeding that of potential output.
Overall, wage increases were generally seen as modest. A couple of participants expressed the view that, when the rate of labor productivity growth was taken into account, the pace of recent wage gains was consistent with an economy operating near full employment.
Several participants reported that business contacts appeared to be more confident about the economic outlook and thus more inclined to undertake capital expansion plans. In that context, it was noted that the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions was enacted; a few participants judged that the prospects for significant tax cuts had risen recently.
With the balance sheet normalization program under way and with the balance sheet not anticipated to be used to adjust the stance of monetary policy in response to incoming information in the years ahead, members generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements might not need to mention the program.
Of course, within the next few months many of these Fed heads wil be gone - so who knows what that means.
This being the Fed, some FOMC members were quick to point out that the asset bubble is getting bigger, and when it bursts, there will be deflationary hell to pay :
In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy.
Meanwhile, according to the staff, which clearly can read a Dow Jones chart, "asset valuation pressures across markets were judged to have increased slightly, on balance, since the previous assessment in July and to have remained elevated; leverage in the nonfinancial sector stayed moderate."
What is bizarre is the Fed's perpetually flawed assumption that financial leverage is somehow low: "in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low." It isn't: not only is vol vega all time high, but hedge fund leverage has never been higher as Goldman showed earlier today.
Finally, the most amusing part of the minutes was the Fed's confusion why the market not longer believe it has any intentions to - you know - tighten:
A few participants mentioned the limited reaction in financial markets to the announcement and initial implementation of the Committee’s plan for gradually reducing the Federal Reserve’s securities holdings. It was noted that, consistent with that limited response, market participants had characterized the Committee’s communications regarding the balance sheet normalization program as clear and effective.
"clear and effective."
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Since the Nov 1st Fed meeting, gold is the biggest winner as the dollar index has been in freefall...
And the yield curve has collapsed...
Which is odd given that market expectations for rate-hikes has continued to rise... now expecting almost 2.5 hikes in the next 12 months...
As a reminder, The Fed is normalizing the balance sheet - and as Yellen said last night - "so far so good"... So far The Fed (since the end of September) has shrunk the balance sheet by 0.17%... or 7.3Billion of a 4.5 trillion balance sheet
And finally - financial conditions have never been easier...
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Full Minutes
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