Since the July 26th 'nothingburger' FOMC statement, Nasdaq is down but bonds and bullion are higher as domestic politics and global war have trumped monetary machinations. All eyes in today's Minutes will be on any mention of inflation and the balance sheet. The Fed sees inflation "picking up over the next couple years" but this came before last week's dismal CPI/PPI data (and they noted "downside risks"), and confirmed that they will make a balance sheet move "at upcoming meeting."
Additional headlines:
- *MOST FED OFFICIALS SAW INFLATION PICK-UP OVER NEXT COUPLE YEARS
- *MOST FED OFFICIALS BACKED B/SHEET MOVE AT `AN UPCOMING MEETING'
However, The Fed is worried about inflation…
- *MANY FED OFFICIALS SAW WEAK INFLATION DUE IDIOSYNCRATIC FACTORS
- *SOME OFFICIALS CONCERNED BY WEAK INFLATION, ARGUE FOR PATIENCE
Worried about a bubble and financial conditions…
Several participants noted that the further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions. However, different assessments were expressed about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.
According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.
And worried about balance shet normalization…
Investors also reportedly viewed the Committee's planning as mitigating the risk that the process of reducing the size of the Federal Reserve's balance sheet would lead to outsized movements in interest rates or have adverse effects on market functioning.
Of course, any confusion in these minutes can always be cleaned up next week at Jackson Hole.
* * *
Rate hike odds for December are around 42% – unchanged from the FOMC Statement in July…
Not what The Fed was hoping for…
The dollar is unchanged but bonds are bid…
Why is the FOMC considering raising rates again this year? Bloomberg notes one reason is concern about asset prices and the potential from the unwinding of a bubble. This could well have been debated, with, for example, Eric Rosengren of Boston particularly worried about commercial real estate, while Yellen has cited stock prices as being elevated.
Of course, that's not how the market sees it…
Full FOMC Minutes below:
via http://ift.tt/2wb99y7 Tyler Durden