FOMC Minutes Signal Rate-Hike “Soon”, Economic Weakness “Transitory”

Having top-ticked US economic data with its March rate-hike, all eyes are on the May minutes to confirm the total lack of data-dependence now present at The Fed. The main focus of the minutes was on the 'normalization' of the balance sheet (since June hike odds are at 100%), which was confirmed with details of the plan revealed. Economic weakness in Q1 was shrugged off as "transitory" and tightening is appropriate "soon" signaling June is on. Fed also warns of asset valuations.

Fed Minutes Headlines:

*MOST FED OFFICIALS SAW TIGHTENING LIKELY APPROPRIATE `SOON'
*FED BALANCE-SHEET PLAN WOULD RAISE ROLLOFF CAPS EVERY 3 MONTHS
*FOMC VOTERS: PRUDENT TO AWAIT EVIDENCE SLOWDOWN IS TRANSITORY

What the market appears to be focusing on is the triple reiteration of "weakness" in the FOMC minutes, and furthermore the warning that Q1 GDP weakness was not due to seasonality:

The staff judged that the weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitorily soft consumer expenditures and inventory investment.

And another risk factor: the Fed expected PCE inflation to pick up more the spring "which would be more consistent with ongoing gains in employment." It did not happen…

Importantly, PCE growth was expected to pick up to a stronger pace in the spring, which would be more consistent with ongoing gains in employment, real disposable personal income, and households’ net worth.

And what if that does not continue to happen, especially as the commodity surge base effect jump is now behind us and headline inflation is poised to decline?

Ironically, just a few lines lower, the Fes does blame the weather:

It was noted that much of the recent slowing likely reflected transitory factors, such as low consumer spending for energy services induced by an unusually mild winter and a decline in motor vehicle sales from an unsustainably high fourth-quarter pace. Nevertheless, contacts expected that demand for motor vehicles would be well maintained.

Sure, it could also be inducted by the collapse in demand for auto and credit card loans as the Fed itself discovered just a few days after the May FOMC meeting in its latest Senior Loan Officer Survey, and reported previously here.

Yet despite the Fed's growing concern about "weakness", its conclusion was that gradual tightening remains appropriate:

Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate.

As for employment and inflation…

Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were judged to be roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

Also notable is the Fed's explicit warning that "vulnerabilities have increased for asset valuation pressures."

This overall assessment reflected the staff’s judgment that leverage as well as vulnerabilities from maturity and liquidity transformation in the financial sector were low, that leverage in the nonfinancial sector was moderate, and that asset valuation pressures in some markets were notable. Although these assessments were unchanged from January’s assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising the assessment of these vulnerabilities to elevated.

Translated: the prices are too high!

* * *

If The Fed somehow makes believe that the data "continues to support" normalization, then their credibility just went negative…