5 Things You Might Have Missed in the Fed’s Minutes

Barrons2021-04-08

Trading was quiet Wednesday, with stocks closing in mixed territory and the benchmark 10-year Treasury yield flat after the Federal Reserve’s latest meeting minutes didn’t provide much in the way of ...

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Weichao
2021-04-08
Weichao
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- Wiko:
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kohaku84
2021-04-08
kohaku84
Fomc

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While the economy is showing signs of recovery and markets are pricing in a strong rebound in growth, members of the Federal Open Market Committee, or FOMC, said it “would likely be some time” before they will need to start winding down their $120 billion in bond purchases, which is seen as an initial step on the path toward raising interest rates.“Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the Committee’s longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook,” the minutes said. That tracks with Powell’s comments.That doesn’t mean there weren’t some notable details in Wednesday’s meeting minutes. The Fed’s staff and members of the Fed’s policy committee discussed some important market trends that could matter for markets. Here are five:Why central bankers (and their staff) think Treasury yields are rising.Fed officials and staffers discussedthe selloff in Treasuriesthat have pushed 10-year yields up by nearly 75 basis points, or hundredths of a percentage point, so far this year. The main driver of the increase since January hasn’t been inflation expectations, but rather an increase in “real” or inflation-adjusted yields.In theory, real yields should reflect expectations for Fed policy. But while staffers did discuss bets that the Fed would tighten—more on that later—they attributed “a significant portion” of the market’s selloff to rising term premiums, a catchall metric meant to capture factors that can affect yields other than inflation or Fed policy forecasts. The rise in term premiums could be reflecting fiscal policy or the increase in long-term Treasury issuance planned to finance Covid-19 relief efforts.“Higher term premiums could reflect the outlook for more expansive fiscal policy and an associated upward revision in the expected path for Treasury debt outstanding,” said staffers, according to the minutes’ summary of the discussion. “Increased uncertainty over the outlook for longer-term interest rates as well as technical factors may also have contributed to the rise.”For their part, the FOMC members “generally viewed [the increase in yields] as reflecting the improved economic outlook, some firming in inflation expectations, and expectations for increased Treasury debt issuance.” Not too much to worry about, in other words.Officials were slightly less sanguine aboutthe ugly trading in late February, however: “Disorderly conditions in Treasury markets or a persistent rise in yields that could jeopardize progress toward the Committee’s goals were seen as cause for concern.”Bond traders are saying and doing different things.The Fed’s staff might be attributing the rise in yields to the kitchen-sink indicator known as the term premium, but markets are still betting on a quicker pace of Fed rate increases.Staffers acknowledged this, according to the minutes, and said derivatives markets are pricing the Fed’s first rate increase in the first quarter of 2023.But staffers also played down the issue by highlighting surveys of bond traders and institutional investors. Those market participants tell the Fed they have only slightly increased their forecasts for interest rates since late January. Surveys now indicate that investors and traders expect rates to be five basis points higher at the end of 2023, or one-fifth of a rate increase. In contrast, market-based estimates have increased by 50 basis points, implying two rate increases.So what’s responsible for the discrepancy? It could be that a large group of investors that aren’t surveyed are betting on quicker rate increases, or investors and traders could be hedging against a range of possibilities for Fed interest-rate hikes whether or not they believe they will come. Or traders could be saying one thing and doing another.The Fed knows it has options if money-market rates keep falling.Another issue that came up in the Fed’s discussions was declining money-market rates. Plenty of cash has already been sloshing around the U.S. financial system looking for a home, as the Treasury Department reduces its bill issuance and its cash balance ahead of the debt-ceiling reinstatement this summer. Plus, the reinstatement of some regulatory requirements may push more cash away from global banks and into money-market funds instead.Officials have partly addressed this issue already, with a technical tweak of one of their policy tools called the overnight reverse-repurchase (or repo) facility.The facility provides a place for money-market funds to put their cash overnight at a 0% rate. That is meant to prevent those funds from sending too much cash into short-term Treasury bills or repo markets, which could boost demand so much in those markets that interest rates fall below zero.The Fed said at its last meeting that each money-market counterparty can pledge $80 billion of cash with its facility overnight, up from $30 billion previously. According to the meeting minutes, a few FOMC members said they would support lifting the limit altogether.Inflation forecasts carry much less weight than results.Fed Chairman Powell addressed this in his press conference after the Fed’s latest meeting. But the minutes didn’t include much indication of worry about runaway inflation, or any hints of dissent in officials’ desire to wait for stronger inflation to appear before tightening policy.That matters because some Wall Street hawks have focused on this year’s steady rise in market inflation forecasts as a sign that the Fed may fall behind the curve, so to speak, and end up raising interest rates too late to prevent harmful inflation. But analysts at BCA Research have found that in times when the Fed’s favored inflation gauge averages around its target, market forecasts usually average around 2.3% to 2.5%.“Participants also noted the importance of communicating to the public that…the path of the federal-funds rate and the balance sheet depend on actual progress toward reaching the Committee’s maximum-employment and inflation goals,” Wednesday’s meeting minutes said. “In particular, various participants noted that changes in the path of policy should be based primarily on observed outcomes rather than forecasts.”That should provide some assurance to investors who are concerned about the market’s five-year inflation forecasts rising to around 2.5%.A few officials are starting to worry about “financial imbalances.”A noninflation concern that was given slightly more airtime in the meeting minutes was the possibility of excess in financial markets, given stock markets near record highs, Treasury yields low, and some riskier companies paying near-record-low costs to borrow.“A couple of participants expressed concern that highly accommodative financial conditions could lead to excessive risk-taking and the buildup of financial imbalances,” the minutes said.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":348015612,"gmtCreate":1617868273436,"gmtModify":1704704133216,"author":{"id":"3572682061977022","authorId":"3572682061977022","name":"Weichao","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":".","listText":".","text":".","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/348015612","repostId":1122722518,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3985936,"gmtCreate":1617869543283,"gmtModify":1680783294637,"authorId":3573709230961984,"author":{"id":3573709230961984,"authorId":3573709230961984,"name":"Wiko","avatar":"https://static.tigerbbs.com/070440cd507e52469c8f8655640cf904","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348015612,"type":1,"supId":0,"prevId":0,"content":".","text":".","html":"."}],"langContent":"EN"},{"id":348012818,"gmtCreate":1617868017334,"gmtModify":1704704131926,"author":{"id":"3571784946922966","authorId":"3571784946922966","name":"kohaku84","avatar":"https://static.tigerbbs.com/ced1f1ad7dc4fefc13b10ec983b8fd7e","vip":1,"crmLevel":5,"crmLevelSwitch":0},"htmlText":"Fomc","listText":"Fomc","text":"Fomc","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348012818","repostId":1122722518,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":9,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1122722518"}