Why Yellen’s Testimony Was Not Dovish Enough: Bank CEOs Told Her The ‘Economy Is Stronger Than Markets Imply’

Every quarter members of the Fed meet with 12 representatives of the U.S. banking industry who comprise the Federal Advisory Council.  This is what the Fed says about this specific council:

The Federal Advisory Council (FAC), which is composed of twelve representatives of the banking industry, consults with and advises the Board on all matters within the Board’s jurisdiction. The council ordinarily meets four times a year, the minimum number of meetings required by the Federal Reserve Act. These meetings are always held in Washington, D.C., customarily on the first Friday of February, May, September, and December, although occasionally the meetings are set for different times to suit the convenience of either the council or the Board. Each year, each Reserve Bank chooses one person to represent its District on the FAC, and members customarily serve three one-year terms. The members elect their own officers.

Here are the 12 current “bank representative” members:

  • Richard E. Holbrook, First District
  • James P. Gorman, Second District
  • Scott V. Fainor, Third District
  • Paul G. Greig, Fourth District
  • Kelly S. King, Fifth District
  • O.B. Grayson Hall, Jr., Sixth District
  • Frederick H. Waddell, Seventh District
  • Ronald J. Kruszewski, Eight District
  • Patrick J. Donovan, Ninth District
  • Jonathan M. Kemper, Tenth District
  • Ralph W. Babb, Jr., Eleventh District
  • John G. Stumpf, Twelfth District
  • Herb Taylor, Secretary

We bring this up because according to the just released records from the most recent, February 3, meeting one which came one week ahead of Yellen’s congressional tesimony which on both days sent markets into a tailspin because Yellen “was not dovish enough” according to sellside commentary, she was told “the economy is stronger than the recent negative market sentiment would imply.”

Specifically, this is what the Council was tasked with responding at the latest meeting:

What is the Council’s view of the current condition of, and the outlook for, loan markets and financial markets generally? Has the Council observed any notable developments since its last meeting for loans in such categories as (a) small and medium-size enterprises, (b) commercial real estate, (c) construction, (d) corporations, (e) agriculture, (f) consumers, and (g) homes? In particular, what is the likely impact of the recently issued Statement on Prudent Risk Management for Commercial Real Estate Lending on banks’ lending practices?  Do Council members see economic developments in their regions that may not be apparent from the reported data or that may be early indications of trends that may not yet have become apparent in aggregated data?

And here was their main response:

The Council believes the economy is stronger than the recent negative market sentiment would imply.

Some of the other things the bank CEOs said:

  • Lenders are generally still highly competitive on rates, and looser structures are becoming more common, particularly on buyout financing.
  • The demand for loans is anticipated to increase moderately through 2016, consistent with a moderately expanding U.S. economy. Soft commodity pricing may reduce some demand for working capital credit.
  • More stress in the energy sector and in the manufacturing sector are to be expected going forward. To date, oil and natural gas prices remain weak and show little prospect of significant increase in the near term. Ongoing low oil and natural gas prices, combined with decreasing protection from price hedges, along with tightening credit standards, will extend the current high-stress environment for many petroleum-related companies into 2016. High-level economic indicators for the manufacturing sector are also cooling down, as recent consecutive contractionary readings in the ISM manufacturing index were the lowest since the last recession. Several regional purchasing-manager surveys have also indicated contraction over the past year.
  • The financial markets will be greatly influenced by the decisions of the FOMC on monetary policy, with discussion centering on the speed of the rate-increase cycle.
  • Commercial real estate and construction demand is steady, with strong competition for quality credits.
  • The consumer credit market remains strong, with stable-to-improved mortgage activity and increased demand from new homeowners, supported by household formation. Auto loan volumes are robust due to record auto sales and a supportive consumer sentiment.
  • The strong dollar continues to weigh on commodity prices and manufacturing activity

Of the above, the bolded statment is key, which may well have solidified Yellen’s rather upbeat view that the economy is strong enough to not only be able to sustain the rate hike cycle, but to neither rush in adjusting the “dot plot” lower if not horizontal for the next two years (as the market implies), but to actually proceed with another rate hike during the March meeting especially if the Atlanta Fed’s Q1 upward revised forecast of Q1 GDP which just rose to 2.7%, is accurate.

The above also poses the question: who is it that decides the fate of the Fed’s rate hikes – the Fed, or the 12 bankers on its advisory council.

The full meeting record can be found here.


via Zero Hedge http://ift.tt/1PHPjJT Tyler Durden

Leave a Reply

Your email address will not be published.