FOMC Minutes Signal Fed On Hold Despite “Elevated Downside Risks”

Since The Fed cut rates on Oct 30th, Gold is the laggard (there’s no more risk) as stocks have soared (trade deal hope) with the dollar and bonds practically unchanged…

The 30Y Yield is well below (and the yield curve is notably flatter) pre-FOMC levels…

Source: Bloomberg

And, rather notably, despite endless FedSpeak jawboning the fact that The Fed is on hold (and data-dependent) now; given today’s move on trade-deal headlines, the market is now more dovish than it was right after The Fed cut in October…

Source: Bloomberg

And of course, while The Fed claims to have got the repo-calypse under control, it remains forced to puke ~$70 billion every day (not cumulative) to plug whatever hole there is…

All of which makes today’s Minutes rather stale as it will be focused on the “end of the mid-cycle adjustment” just as the “mid-cycle” is set to collapse again as trade-deal hopes evaporate. Still, the minutes may provide some insight into what could prompt the Fed to move again on rates, be it higher or lower.

As a reminder, at the last meeting, The Fed cut rates by 25bps, as was anticipated. Hawkish dissent came from George and Rosengren again, although Bullard did not repeat his call for a deeper rate cut. The statement saw the Fed tweak its language on future rate moves, now stating it will “continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate,” (from “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion” – a line that the market had taken to meet that the door to further cuts was open); the tweak was subtle, which analysts said gives the Fed optionality on future moves. Additionally, much of the language on the economy was left unchanged

So what did they say?

Here are the Key Takeaways from the FOMC minutes (via Bloomberg):

• While most Fed officials saw rates as “well calibrated” and likely on hold barring a “material reassessment” of the outlook, policy makers stressed the downside risks in justifying a third straight rate cut at the October meeting. Many also cited low inflation or price expectations.

• The minutes illustrate a split on FOMC, as a “couple” of participants who backed a cut saw it as a “close call,” while “some” favored no change.

• Policy makers generally expected consumer spending to “remain on a firm footing” and labor demand appeared strong, though trade uncertainty and sluggish global growth would continue to weigh on businesses.

• Fed officials discussed additional options to control the benchmark interest rate following the start of large-scale repo operations and Treasury-bill purchases. Many policy makers saw a standing repo facility as a potentially “useful backstop,” though with ample reserves, “there might be little need” for such a facility or for frequent repo operations.

• The FOMC held a discussion on the value of various nontraditional tools for easing when interest rates are near zero. The minutes indicated general support for forward guidance and large-scale asset purchases. On the other hand, there was skepticism about capping long-term rates, and “all participants” saw negative rates as unattractive, though officials wouldn’t completely rule out the option.

In summary, the minutes don’t change what the market knows from listening to Powell and various other Fed speakers recently, which explains a lack of reaction in bonds, stocks, the dollar, or Fed Funds.

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Full Minutes below: