The Market’s Misread Of The Fed’s Minutes

Last week, the Federal Reserve released their March FOMC meeting minutes. Following the release, the markets surged higher as the initial reading by the markets was “the Fed is done hiking rates.” As the Wall Street Journal reported in Fed Minutes: Officials See Little Need to Change Rates This Year.

‘Minutes of the March meeting released Wednesday showed officials see little reason to continue raising rates due to greater risks to the U.S. economy from the global growth slowdown and muted inflation readings that took more officials by surprise.

‘A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year,’ the minutes said.

At the same time, the minutes show officials didn’t perceive any need to cut their benchmark rate absent a broader deterioration in the economy. Officials said their view of the appropriate setting for interest rates ‘could shift in either direction based on incoming data and other developments.’

Since officials last met, President Trump has said he would like to see the Fed undo its last two rate increases. Fed officials have said they will base their decisions on the economic outlook and not political pressure.’

See, nothing to worry about as there are no recessions predicted by the Fed…ever.

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As Peter Boockvar noted Wednesday afternoon, don’t believe for a moment the Fed isn’t specifically targeting the market:

“I’ve said many times to insert ‘S&P 500’ for ‘financial developments’ because that is essentially what we’re talking about here when its cited. So the Fed is referring to ‘significant uncertainties’ with regards to the S&P 500. What uncertainties exactly now since the S&P 500 is just off all time record highs?

They also acknowledged that their jawboning which shifted policy to one that is more ‘flexible’ is what boosted the stock market. ‘In their discussion of financial developments (S&P 500), participants observed that a good deal of the tightening over the latter part of last year in financial conditions (S&P 500) had since been reversed; Federal Reserve communications since the beginning of this year were seen as an important contributor to the recent improvements in financial conditions (S&P 500). Participants noted that asset valuations had recovered strongly.’

Thanks Fed, high five and the parenthesis and underline are obviously mine.”

But here is the problem with the market’s assumption:

“The Fed Did Not Say They Were Done Hiking Rates”

While the Fed said they would be “patient” for now, there are already indications that economic growth and inflation will pick up over the next couple of quarters, (No, this isn’t the revival of the economy, but simply a normal seasonal bounce from pent up demand following a cold winter.) 

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