I find interpretations of FOMC minutes to always be an interesting affair. Like a Rorschach test for the financial community, interpretations of FOMC minutes can reveal more about the observer than the FOMC themselves.
I myself have been skeptical of the supposed power of “The Magic People” affectionately known as central bankers. And I suspect that even some of the Fed officials believe that this expansion is on its last legs. It’s why I’ve long held the belief that the Fed has desired since early 2015 to begin a tightening cycle but has been hamstrung by consistently disappointing data.
My fellow skeptics would happily tell them that this is what happens late in a cycle. The data continues to deteriorate until we hit a recession or worse.
Unfortunately, the members of the FOMC have no use for cycles in their forecasts. Apparently they wake up and go to sleep with the sun locked in the exact same spot in the sky ever day. Winter spring, summer, fall, these have no impact on modern financial markets which are completely detached from all things in nature.
But that’s beside the point. The Fed once again appears to be testing the waters. Two Fed governors (who have no say in rate hikes) came out the day prior and floated the possibility of a June rate hike. Then the FOMC minutes come out and you can see the desperation in their language.
I haven’t been reading these long and, I’m only got 30% of the way through Maestro before I misplaced my kindle last week, but this set of FOMC minutes feels like a shotgun blast to the face.
Almost every major macro concern from the freaking Puerto Rican debt crisis to China to US consumer spending to the accuracy of their own GDP calculations and finally to the market’s misinterpretation of the March minutes. They seemed very hurt by that last one. After all how could anyone misinterpret such a transparent and clear piece of communication.
Not lost in the barrage of pellets is the Fed’s desire FOR THE MARKET TO PRICE IN A RATE HIKE. Out of fear that the bold and underline may not be enough for that last bit to be interpreted as important I will state it again so that there is no March minutes style misinterpretation. The Fed wants the market to price in a rate hike.
The Fed wanted to maintain complete flexibility and at the same time communicate to markets that it should price in a rate hike. If the price is right they will hike.
My guess though, is the price will not be right. China devalued the Yuan this morning. The dollar surged even harder dragging commodities and inflation with it. Although the market’s initial reaction was a steeper yield curve, as I said back in December, a rate hike flattens the yield curve by dragging down long term inflation expectations while raising short term rates.
This is bad for banks which is bad for credit and since we live in a credit fueled world, it is bad for growth, which by the way according to the guys at Hedgeye are suggesting that Q2 GDP growth will be sub 1%. They have been much more accurate AND precise when it comes to GDP tracking than the Atlanta Fed whose Q1 GDP tracker ranged from 2.2% to 0.1%, and now is forecasting an unbelievable 2.8% for Q2.
With sub 1% GDP growth, rising jobless claims, slowing employment growth, declining retail sales, a rising dollar, and Chinese warning signs I find it very difficult to believe that the Fed will hike in June. These minutes were the Fed’s attempt to understand how cornered they are. The market of course ran with it and perhaps in June the Fed will be talking about how the markets once again misinterpreted the Fed’s true intentions. Time will tell.