FOMC Minutes for September Meeting
Comment of the Day

October 12 2022

Commentary by Eoin Treacy

FOMC Minutes for September Meeting

This excerpt of commentary following the release of the Fed Minutes may be of interest. Here is a section:

It will take years to see inflation pressures completely recede, according to the minutes. That’s also apparent in the Fed forecasts, which don’t see headline inflation returning to 2% until 2025, and core still above that then.

Catarina Saraiva  Fed Reporter

10/12 19:26

Regarding QT, several officials said it would be “appropriate” to consider sales of agency MBS at some point so the Fed’s long-term portfolio can be composed primarily of Treasury securities.

Ian Lyngen at BMO Capital Markets comments:

“Not new information per se, but nonetheless reinforcing the idea that for the time being the status quo of QT will be maintained. Especially after the volatility experienced in the gilt market, and liquidity in both mortgages and Treasuries already becoming an issue, we don’t expect MBS sales from SOMA will be a near term issue.”

Ye Xie  Markets Reporter, New York

10/12 19:25

Here’s something to keep in mind when looking at tomorrow’s CPI report:

“Participants commented that they expected inflation pressures to persist in the near term.”

Catarina Saraiva  Fed Reporter

10/12 19:25

The median estimate of Fed officials’ projections in the September SEPs was for unemployment to climb to a high of 4.4% next year. Many economists have said this is wishful thinking, and that it will likely rise much higher if the Fed keeps raising rates. It sounds like some at the Fed are concerned about this as well.

“A few participants particularly stressed the high uncertainty associated with the expected future path of the unemployment rate and commented that the unemployment rate could rise by considerably more than in the staff forecast.”

The highest unemployment rate forecast among the 19 policymakers for 5% in 2023.

Eoin Treacy's view

The steadier action focusing on the “calibrate” statement implies the Fed will slow down the pace of interest rate hikes after the November meeting. The thing I find most interesting about this evolving environment is the willingness of investors to pre-empt what the federal reserve will do. It’s a symptom of relying on past experience to inform future decisions. We know what has happened on every other occasion, so why not this time? That’s why buying the dip works after all.

The problem right now is inflation is damaging the Fed’s credibility. We often forget that supporting asset prices is not official Fed policy. It was part of the suite of tools deployed to deal with the aftermath of the credit crisis. The logic was that by supporting asset prices, demand would return quicker and the benefit would trickle down to consumers. Now that inflation is running ahead of expectations and the economy is at full employment, the Fed has to focus on getting prices down so animal spirits are caged. To my eye they are going to keep tightening until they get a recession. That suggests we are in a sell the rallies rather than a buy the dip environment.
The Nasdaq-100 is short-term oversold but a clear upward dynamic will be required to check momentum and pressure shorts.

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