Negative Beige Book Signals Fed Will Be Dovish

Negative Beige Book

Fed’s Beige Book was released on Wednesday. It’s no surprise that the Fed has become more cautious about the economy. To be clear, the Beige Book doesn’t affect my own analysis on the economy and shouldn’t affect yours either. We follow this report to understand the Fed policy.

Fed’s analysis is usually late because the Fed is afraid to change policy too soon. However, being late isn’t ideal either. Being late isn’t an option for traders and investors because stocks often move ahead of the economy.

In this instance, stocks fell at the end of last year before the Fed acknowledged the economic slowdown.

Fed finally recognizing the slowdown helped boost stocks because it means the Fed will be more dovish. The Fed is moving in the right direction as the number of rate hikes it expects is shrinking. It’s common to hear various Fed officials claim the Fed could stop hiking rates altogether. That’s not exactly news...

Negative Beige Book - Fed funds futures market has been expecting zero rate hikes this year for a while.

The chart below shows the Fed’s use of the word tariff and anything with the word slow in it. As you can see, the usage of the word tariff has declined to only 20 times. It’s not as if tariffs aren’t still in play.

Fed probably stopped mentioning the term because new tariffs aren’t being enacted. The U.S. and China are in a 90-day negotiating window where no new tariffs can be enacted.

The bad news on the trade front is that on Wednesday the U.S. Justice Department announced it will pursue a criminal case against Huawei for trade secret theft relating to T-Mobile’s robotic device called “Tappy” which tests smartphones.

Anytime America acts against Huawei it strains its relationship with China. The chart also shows the use of the word slow in any form has increased from 43 to 65 which is the highest usage in at least the past 12 months. This supports my point that the Fed will be dovish at its next meeting on January 30th.

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