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Fed Minutes Confirm Growing Sense of Unease

Karl Schamotta April 10, 2019

Minutes taken during the last Federal Reserve meeting show that a majority of policymakers no longer expect the central bank to raise interest rates this year – but that they will remain flexible in the face of rapidly-changing economic conditions.

According to a record of the March 19-20 meeting published today, officials saw “muted” inflation pressures and had become increasingly concerned about the “significant uncertainties” facing the global economy. Brexit, ongoing trade negotiations, weakening domestic consumption and softness in the Chinese and European economies were all suggested as factors that could derail what has become one of the longest economic expansions on record.

After four increases last year, interest rates were kept on hold at the meeting, and the statement sounded a distinctly-dovish note – completing a communications pivot that began in December.

Participants remained largely convinced that weakness in the American economy during the first quarter would prove transitory, and several people suggested that a rate increase might yet prove justified. “Some time would be needed to assess whether indications of weak economic growth in the first quarter would persist in subsequent quarters”.

However, for the significant number of investors betting that the next move in interest rates will be down, policymakers didn’t take the possibility entirely off the table – as the minutes put it; “Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments”.

Weak inflation continued to puzzle policymakers – “Many participants indicated that, while inflation had been close to 2 percent last year, it was noteworthy that it had not shown greater signs of firming in response to strong labor market conditions and rising nominal wage growth, as well as to the short-term upward pressure on prices arising from tariff increases”.

This morning’s core inflation numbers remained consistent with an economy that is decelerating slightly – and did not exhibit signs of strain that might normally accompany the improvement in employment conditions that has occurred at this stage in the economic cycle.

The Committee spent a lengthy amount of time discussing the role that inflation expectations are playing in keeping price changes controlled, and suggested that interest rates could be on a “very flat trajectory” for a considerable period of time.

Officials also discussed plans to slow the pace at which the central bank’s balance sheet is unwound, but took pains to characterize this as a technical modification, not a change in the amount of stimulus flowing into the economy.

In a decision released earlier today, the Fed’s European counterpart also took a gloomy view, pointing to “persistent weakness” in economic data as it kept policy rates stable. The central bank avoided providing new details on its stimulus plans, and no adjustments were made to the “forward guidance” typically provided – meaning that those changes will likely come in the next two or three meetings.

Currency traders woke briefly around the release, but with expectations confirmed, have largely returned to their afternoon naps. With central banks acting to put a floor under asset prices, while economic weakness caps upside, volatility in most major currencies has fallen to a five-year low – raising the possibility that we are experiencing the calm before a storm.

Bottom Line: Minutes from the Federal Reserve’s March meeting confirmed what market participants have long known – that a rising level of uncertainty, accompanied by a sharp turn in the underlying economic narrative has pushed the central bankers firmly onto the sidelines. Turmoil originating in the White House has accomplished what President Trump’s tweets could not – but at a cost that has yet to be counted.

“Quantitative tightening”, we hardly knew ye.

Karl Schamotta
Chief Market Strategist


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