FOMC Minutes: The New Narrative Takes Shape

Nothing the Fed did today or has done up to today has changed the curves. Eurodollar futures and UST’s, they are both still inverted. The former is sharply inverted. The only thing that has changed since early January is the narrative – and not in a charitable way. It is treated as a positive when it is a pretty visible signal about deteriorating circumstances.

Interpretations matter.

Conventional wisdom seems settled on some version of QT. And why not? Foreign central bankers (now former central bankers) were complaining about it all the way back last June! Jay Powell and his gang of illusionists in their infinite wisdom simply ignored it. They immediately dismissed the “strong worldwide demand for safe assets” as irrational mispricing.

Now they are convinced? Even QT has been to blame, that doesn’t speak very highly of our own monetary technicians.

The emerging new narrative is this: the Fed broke it, so now that the US central bank has realized its own error, it can fix everything. Problem solved a minor disturbance in the grand scheme of resumed globally synchronized growth. A reflation within a reflation, if you will.

You aren’t supposed to notice how drastically things have changed during this period. It starts with 240, as in EFF of 240 bps cannot possibly be a problem for a superstar economy. Powell at this time last year when first taking office was resolutely hawkish; because, in his view, one widely shared at the time, inflation was by far the biggest economic risk out there. Things were in danger of becoming too good.

There is absolutely no way a topline federal funds “corridor” of 2.50% is responsible for what the latest meeting minutes describe in the emergence of dreaded downside risks. In February 2018, the FOMC was increasingly sure they couldn’t wait on more rate hikes. In February 2019, suddenly there is no danger to doing nothing.

Some participants noted that some factors, such as the decline in oil prices, slower growth and softer inflation abroad, or appreciation of the dollar last year, had held down some recent inflation readings and may continue to do so this year. In addition, many participants commented that upward pressures on inflation appeared to be more muted than they appeared to be last year despite strengthening labor market conditions and rising input costs for some industries.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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