Yesterday we published the FOMC Meeting Minutes verbatim, but we expect many of you did not work through the tediously long report. Thus, we've taken some time to do that for you. Below, please find our summary and analysis of the latest FOMC Meeting Minutes.
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On an otherwise light news day Tuesday, the release of old news not yet known keyed the wire, and that release did not come until 2:00 PM ET. It was the highly anticipated FOMC September meeting minutes that traders waited on to stir stocks. It was just after the release that stocks spiked, dipped and then drove higher to the close. In fact, the market is so centered in its vision now, that the Fed seems sure to let it down. We published the latest FOMC Meeting Minutes verbatim yesterday, but have sifted through since, in order to provide you with a more easily digestible summary and analysis.
The Summary & Analysis
The FOMC's report on its balance sheet and financial markets activities offered some interesting insight. In the period between August 10 and September 21, the Fed continued to operate in the MBS and treasury markets for the benefit of the economy. On its decision to do so in August, the Fed engaged in the reinvestment of principal payments on agency debt and agency mortgage-backed securities (MBS) in longer-term Treasury securities.
What More Can the Fed Do?
The Fed acquired $28 billion in Treasury securities of 2 to 10 year maturity during the period. The Fed's efforts have thus far contributed to a lower rate environment, but that has not translated into robust economic growth. In the mortgage market, the Fed's actions and anticipation of future actions are likely having an impact on record low rates, but so is still weak demand for real estate. This confluence of activity brings light to the possibility that the Fed cannot do much more in this regard, but we see hints of its creative thinking coming to the fore, as it finds other means to affect the economy and effect growth.
Are the Fed & Treasury Capable of Waging Currency War?
We found this statement especially interesting and foreshadowing:
"There were no open market operations in foreign currencies for the System's account over the intermeeting period."
There is now speculation that the US might counter China's currency manipulating actions in the financial markets to encourage greater market pressures to drive the yuan where it wants to go, which is higher. It is generally thought that a higher yuan will enable a more competitive marketplace for US manufacturers selling into the US. The hope is that we can put people back to work by reviving the manufacturing sector, which can only occur under competitive conditions. By now I hope you understand that the cost will be higher priced goods.
In future FOMC meeting minutes, we might find the Fed has more to say and do in this section of its regular release. It will be like adding red pepper spice to an otherwise moderately flavored meal. Things are about to get real interesting in global trade folks, and the changing dynamics are likely to be swift and offer some surprises. The Treasury and maybe the Fed might get involved in financial and forex market activities that counter China's sketchy yuan supports. Wow, now that would be a battleground galore, and the US seems to be seeking support from Japan and Europe in engaging in this activity. Still, reading through the rest of this report will raise some question as to whether biting China's hand is timely now.
How the FOMC Sees Things
The FOMC's review of the economic situation depicted the state of affairs similarly to as in recent past. The Fed acknowledged a recent moderation in economic growth and in the labor market as well. The group reported still solid industrial production, which by the way has benefited from Chinese demand, and could be a casualty of trade war. You will see intensifying Republican argument along this line of thinking in the weeks before the election. And you'll also note similar threats from China.
The Fed reported on the low level of consumer spending and deterioration in the consumer mood. Consumer credit contracted as well in the second quarter and continues to contract as the months progress. Though, delinquencies and charge-offs continued to moderate as well. Bank lending activity continued to contract, especially in the consumer arena. Though contraction was at a slower pace generally than the rate seen over the past few years.
Housing slipped in the absence of government supports. Foreclosures continue to pressure home pricing and home equity values continue to slide; while stock market equity values increased during the period. Thus, perceived wealth was possibly unchanged, if Americans view equity holdings equal in safety to housing. We expect this varies by individual, and may net to nothing. Meanwhile, commercial real estate activity remained poor and defaults on commercial property loans continued high.
Business investment seems to be losing some of its early year steam, as has CEO confidence for the near future (6 months out). Capital raising on the corporate level was described as robust, but companies are not putting those funds toward long-term investment in labor.
While inflation was "subdued," we are starting to worry about the creep in energy and commodity prices, and its future impact on inflation at the core level. You will not hear this opinion in many places, as the market gears on the current concern, which is deflation.
What Moves the Market
The Fed's economic outlook, and what it might do in response, is what the market is most interested in. The Fed reduced its growth expectations, but continues to see growth for the second half of the year, followed by stronger growth in 2011 and better conditions in 2012. We offer a reminder that the Fed has proven itself as perhaps one of the poorest forecasters in the financial arena.
Inflation expectations continue to remain low. While the consensus agreed that the economic growth rate would likely moderate in the second half, they saw little chance of the renewal of recession. Also, while inflation was judged to be below "stable pricing," they also saw little chance of deflation.
The gist of the notes is summed best by the committee itself, with this paragraph:
"Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations. Participants reviewed the likely benefits and costs associated with a program of purchasing additional longer-term assets--with some noting that the economic benefits could be small in current circumstances--as well as the best means to calibrate and implement such purchases. A number of participants commented on the important role of inflation expectations for monetary policy: With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short-term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy. Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP. As a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public. The minutes of FOMC meetings were seen as an important channel for communicating participants' views about monetary policy."
Fed Let Down Pending
That last paragraph is nothing but the Fed thinking out loud. The final few paragraphs of the minutes characterized a variance in opinions, and recent data left the FOMC members confused as to the true path of the economy. Recent economic data points seemed to show stabilization and the possibility for another pickup in growth. Thus, the Fed seems equally likely to take a wait and see position in the near term as one offering new quantitative easing. And even if it does act, we doubt it will be enough for the market nor for the economy.
We think we might know the Fed's next move (after futile quantitative easing) ahead of its own consideration of it even. We think we will see it and the Treasury engage or seek to engage in currency warfare, to bring down the yuan (November elections might decide this). The government could seek to affect the valuation of the yuan by buying proxies of it and through other means.
Tariffs on Chinese goods remain a strong possibility as well, and this Friday's report from the Treasury on foreign trading partners (China) and an important discussion by Fed Chairman Bernanke on the Fed's next moves, offer opportunity for the two to impact investor and consumer confidence. The question is, will the impact be a positive one or negative.
Sorry folks, but I just do not see much catalyst in the Fed's current plans. I expect the market will find them short of the bar, and given it has likely priced in all hope already, there could be some pullback as fearmongers focus on tensions with China and inaction or poor action by the agencies.
So, I've started thinking of a novel way the government might spur the economy and job market back into gear. It's just an idea at this point, and so I'll need some time to work it out before offering it up. Look for my new idea to be published here in the next few months.
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