From Tyler Durden: Since The Fed decided unanimously to hike rates in mid-December, bonds, banks, and bullion are best but the broad stock market is lower.
The key area of today’s minutes was on the impact of Trump’s policy agenda (which was the focus of Yellen’s press conference), and they did note that there were “upside growth risks from fiscal policy” and this might mean Fed “needs to raise rates faster.”
However, the biggest concern appears to have been uncertainty resulting from Trump’s fiscal policies: “Many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.”
Almost all Fed officials meeting on December 13-14 said the risks of growth surpassing their forecasts had grown because of the possibility of more “expansionary” fiscal policy under president-elect Donald Trump and the Republican-controlled Congress. On the other hand, the FOMC stressed that it was too soon to jump to firm conclusions about what fiscal policy would actually look like. “Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might affect the economic outlook.”
The Fed on December 14 raised short-term rates for only the second time in a decade and predicted a quicker speed of tightening this year compared with the one-a-year pace in 2015 and 2016. Speaking after the meeting, Janet Yellen, the Fed chair, said the Fed was existing in a “cloud of uncertainty” as it weighs the possibility of tax and spending changes under the new Congress and administration.
Among the Minutes’ highlights was that about half of FOMC’s participants incorporated assumption of more expansionary fiscal policy into their forecasts made at Dec. 13-14 meeting.
Key highlights from the report:
On the risk of precommitting to rate hikes:
A couple of participants expressed concern that the Committee’s communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year; participants agreed that policy would need to respond appropriately to the evolving outlook.
On general economic forecasts and uncertainty about the future:
In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply. Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, economic growth might turn out to be faster or slower than they currently anticipated.
On consumer spending:
Participants cited a number of factors likely to support continued moderate gains in consumer spending. Consumer confidence remained positive. The outlook was for further solid gains in jobs and income, and household balance sheets had improved. The personal saving rate was still relatively high, and household wealth had been boosted by ongoing gains in housing and equity prices. In the housing market, recent data on starts and permits for new residential construction suggested a firming in residential investment after two quarters of decline.
On upside risks:
Almost all also indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years.
On the downside risks, which once again include international developments:
The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that monetary policy appeared to be better positioned to offset large positive shocks than substantial adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside.
More on downside risks due to policy uncertainty:
[Policymakers] pointed to a number of risks that, if realized, might call for a different path of policy than they currently expected. Moreover, uncertainty regarding fiscal and other economic policies had increased. Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might alter the economic outlook. It was also noted that fiscal and other policies were only some of the many factors that could influence the economic outlook and thus the appropriate course of monetary policy.
On the impact of Trump tax cuts:
Yields on general obligation bonds rose somewhat more than those on comparable-maturity Treasury securities over the intermeeting period, reportedly reflecting expected reductions in the tax benefit of municipal bonds.
On the rising dollar:
Many participants noted that the effects on the economy of such policy changes, if implemented, would likely be partially offset by tighter financial conditions, including higher longer-term interest rates and a strengthening of the dollar.
On the market:
Available reports suggested that earnings for firms in the S&P 500 index increased in the third quarter on a seasonally adjusted basis, and the improvement in earnings was broad based across sectors
On the impact of rising asset prices:
The personal saving rate was still relatively high, and household wealth had been boosted by ongoing gains in housing and equity prices.
On the unemployment rate and lack of productivity:
Many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly than currently anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures. However, with inflation still below the Committee’s 2 percent objective, it was noted that downside risks to inflation remained and that a moderate undershooting of the longer-run normal unemployment rate could help return inflation to 2 percent.
On unemployment by race:
The unemployment rates for African Americans, for Hispanics, and for whites all declined in recent months. The unemployment rates for African Americans and for Hispanics remained above the rate for whites but were close to the levels seen just before the most recent recession.
On corporate bond issuance:
The credit quality of nonfinancial corporations remained solid. The volume of corporate bond rating downgrades in October and November outpaced that of upgrades but was moderate compared with rates seen in the first half of the year. Default rates and expected year-ahead default rates for nonfinancial firms declined modestly over the intermeeting period, although both remained somewhat elevated compared with their ranges in recent years. Indicators of supply and demand conditions for small business credit were generally unchanged over the past quarter, with demand appearing to remain weak.
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As a reminder, The Fed’s outlooks for growth, inflation, and unemployment were largely unchanged in December from September. That suggested that unlike markets, the Fed did not turn much more bullish after the election, but that appears to have changed in the post-meeting minutes.
Did we get any clarity on?
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NOTE: 2Y Yields were at 1.234% before the minutes.
Financials are up but the broader market is down post-Fed with bonds and bullion best…
The market remains unconvinced at The Fed’s hawkisheness, seemingly pricing a May/June hike and a September hike as most likely (and no 3rd hike).
iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) was trading at $120.31 per share on Thursday morning, up $0.21 (+0.17%). Year-to-date, TLT has gained 0.99%, versus a 1.27% rise in the benchmark S&P 500 index during the same period.
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