December 2022 Fed Meeting Minutes Reveal Fed Policy Foibles
By the
Curmudgeon
Introduction:
Victor and I have been saying for a very long time that the
Fed’s been talking the markets down to produce a “reverse wealth effect.” By reducing asset prices, people feel poorer
which the U.S. central bank believes would decrease consumer demand and hence
lower inflation. We first wrote about
that last May in this piece.
Fed officials firmly believe they won’t be able to defeat
inflation unless they can slow the economy by tightening financial conditions,
such as by raising borrowing costs and lowering stock prices.
Conversely, any market rallies that ease financial conditions
threaten to hinder officials’ effort to cool hiring and wage growth. That, in
turn, could prompt the Fed to continue lifting rates or holding them at higher
levels for longer, increasing the risk of a deeper or longer economic downturn.
Fed to Keep Raising
Rates in 2023:
Seventeen of 19 Fed officials projected rates at or above
5.1% this year. By comparison, not a single official in September had forecast
rates above 5% in 2023.
Continuing the hawkish drumbeat, Minneapolis Fed President
Neel Kashkari said he expects the Federal Reserve will need to raise interest
rates by another percentage point over the next few months, despite signs that
inflation is decelerating.
“While I believe it is too soon to definitively declare that
inflation has peaked, we are seeing increasing evidence that it may have,” Mr. Kashkari said in an essay
published online Wednesday morning. “In my view, however, it will be
appropriate to continue to raise rates at least at the next few meetings until
we are confident inflation has peaked.”
Selected Quotes from
Fed’s Dec 13-14, 2022 Meeting:
The minutes of the Fed’s December 13-14, 2022 meeting,
released today, confirm our “reverse wealth effect” thesis and much, much
more. Please read on and ask yourself
why is the Fed so concerned with stock prices?
“Equity markets moved higher. However, equity market contacts
noted risks to growth ahead, and earnings expectations for coming quarters had been
marked down.”
“Broad stock price indexes increased, likely reflecting
reduced concerns about the inflation outlook and the associated implications
for the future path of policy. On net, the one-month option-implied volatility
on the S&P 500—the VIX—decreased notably and was around the middle of its
range since mid-2020.”
“In line with reduced investor concerns about the inflation
outlook, spreads of interest rates on corporate debt, mortgage-backed
securities, and municipal bonds to comparable duration Treasury yields all
narrowed over the inter-meeting period.”
………………………………………………………………………………………………………………………
“Regarding the outlook for monetary policy, both market- and Desk survey-based measures
indicated expectations for the Committee to maintain elevated policy rates
through 2023. Participants continued to
anticipate that ongoing increases in the target range for the federal funds
rate would be appropriate to achieve the Committee’s objectives.”
“No participants
anticipated that it would be appropriate to begin reducing the federal funds
rate target in 2023. Participants generally observed that a restrictive
policy stance would need to be maintained until the incoming data provided
confidence that inflation was on a sustained downward path to 2 percent, which
was likely to take some time. In view of the persistent and unacceptably high
level of inflation, several participants commented that historical experience
cautioned against prematurely loosening monetary policy.
àMeaning no Fed rate reductions in 2023 as long as stock and bond prices stay elevated!
“With inflation remaining unacceptably high, participants
expected that a sustained period of
below-trend real GDP growth would be needed to bring aggregate supply and
aggregate demand into better balance and thereby reduce inflationary pressures.”
“Participants noted that, because monetary policy worked
importantly through financial markets, an
unwarranted easing in financial conditions, especially if driven by a
misperception by the public of the Committee’s reaction function, would complicate
the Committee’s effort to restore price stability.”
“Looking ahead to year end (and 2023), market participants
anticipated limited pressures. The manager pro tem
noted that if transitory pressures emerged in money markets, the Federal
Reserve’s backstop facilities are available to support effective policy
implementation and smooth market functioning.”
àNO CONTINGENCY PLAN FOR A CREDIT CRISIS OR TREASURY
MARKET LIQUIDITY VANISHING?
Other Voices:
“A big concern of their messaging here is that the market is
pricing in cuts by the second half of this year,” said Michael Feroli, chief
U.S. economist at JPMorgan Chase & Co. With inflation too high, officials
“realize that the risk of overtightening is just something that they have to
swallow and stomach,” he said.
“They don’t see light at the end of the tunnel yet with
inflation,” said Derek Tang, an economist at LH Meyer in Washington. “They’re
so alert of financial easing that’s ‘unwarranted’ that the scale should tilt to
staying with 50 basis points in February. That’ll drive the message home.”
“It seems that there is more of a consensus view that they’ve
got to go above 5% than certainly I would have thought the numbers implied,”
said Kevin Cummins, the chief US economist at NatWest Markets in Stamford,
Connecticut.
Will Fed Continue to Raise
Rates as Inflation Falls?
The Personal Consumption
Index (PCI) is the Fed’s preferred U.S. inflation gauge. As the chart below
shows, it’s been in a steep decline the last four months. That’s sure to continue in 2023 with the
economy slowing further due to previous jumbo rate hikes last year.
A much lower inflation expectation was bolstered by the most
recent reading on price pressures published by the Commerce Department on Dec.
23rd, which showed so-called core inflation — excluding food and
energy — rose just 0.2% in November. That was less than what was implied by the
Fed’s latest projections, and monthly readings of a similar size going forward
would be consistent with a return to the central bank’s 2% target.
……………………………………………………………………………………………………………………
Cartoon of the Week:
……………………………………………………………………………………………………………………Conclusions:
The December meeting minutes also show that the Fed is
unwilling to loosen monetary policy prematurely before its work is done. They
also are uncomfortable with rising stock prices which they think subverts their
inflation fighting mission.
Officials stressed that despite recent slowdowns in price
growth, “it would take substantially more evidence of progress to be confident
that inflation was on a sustained downward path,” the minutes say.
……………………………………………………………………………………………………….
Victor and I wish you
all the best for 2023! Till next
time…………………………
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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