– FOMC minutes show uncertainty and concern about markets are affecting officials’ decision-making
– Officials were cautious when evaluating market conditions and the ‘damaging effects on the economy’
– Worry about ‘potential buildup of financial imbalances’ and a sharp reversal in asset prices’
– Members seem oblivious to impact of inflation on households and savings
– Physical gold and silver remain the only assets for real diversification and safety
After nearly a decade of pumping up the US and global markets, Janet Yellen and team are now starting to show some concern for financial market prices. The FOMC is concerned that they are getting out of hand and are a danger to the US economy.
The minutes of the Fed’s October meeting show that the committee is largely optimistic about the US economy:
“In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate despite hurricane-related disruptions.”
But caution was the name of the game when it came to looking at overall market conditions:
“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances…They worried that a sharp reversal in asset prices could have damaging effects on the economy.”
There isn’t a huge amount you can say in response to the FOMC minutes. There was no surprise, they practically telegraphed a December rate hike. And, when it comes down to ‘financial imbalances’, you really just want to tweet them with ‘…no shi*t sherlock’.
Why the sudden concern?
Really, why the sudden concern about financial imbalances? After all the FOMC has been pumping asset prices for the last decade. They are overjoyed to see the S&P500 regularly breaking through new highs.
The ‘imbalance’ committee members refer to is likely in regard to the risk/reward profile in the price of equity markets. This is somewhat ironic given almost the exact same thing happened with bond markets thanks to QE and the Fed’s balance sheet expansion. Just consider that their own yield curve lies at the heart of the current equities bull market.
The fear seems to be that in the last decade there has been such an expansion of credit that we are now faced with an unprecedented bubble. The Fed has no idea how this can be managed across central banks. They are concerned not only how the bubble will burs but what the contagion will be.
Since the Fed started hiking rates up, markets and financial conditions have not tightened. At all. One could speculate that this shows the market is convinced that the moment equities suffer a selloff, the Fed will either stop hiking altogether, or (worse) revert to the status quo and announce QE4.
At the moment the market is pricing in the risk of further rate hikes into next year. The chart below from HSBC shows “the market has been pricing in more and more 2018 hiking risk. The maroon line in the chart below shows the increase in hiking expectations in recent weeks, with investors pricing in more than 1 1/2 hikes for the first time since April.”
No matter market predictions of Fed rate rises no one can prepare for the aftermath of a $50 trillion debt build-up since the financial crisis of 2008. Nothing like this has been seen before.
In this year alone we have hit a new record when it comes to money printing by central banks. Of course no one knows what we are dealing with. What is more concerning is that the world’s most powerful central bank is only now wondering about financial imbalances in the market.
It’s a fix
As has been the case in many Western countries, central banks have expressed frustration at the stubbornly low levels of inflation. What’s interesting about this is that many of them have spent a long time ensuring that the means by which inflation is calculated gets them closer to their target.
The basket of goods used to calculate the level of price inflation is continuously manipulated.Very often ‘volatile’ food and fuel is not included in the US measure. Why does this matter? Because these are the two main items that affect household finances.
So far this year US inflation has averaged 1.6% so far this year (when you exclude food and fuel) and it came in at just 1.3% in September. This (artificial) low level of inflation appears to have almost baffled FOMC members, with much disagreement amongst them.
For those who believe inflation is low this “might reflect not only transitory factors, but also the influence of developments that could prove more persistent,” according to the minutes. However there were also a few members who expressed concern that it could begin to climb due to “increasing upside risks” to inflation as the labor market continues to tighten.
It was then suggested by ‘a couple’ of members that the Fed tweak its approach to inflation, moving away from the current 2% target and toward a “gradually rising path” in prices instead. A nebulous approach.
We continue to see a divided FOMC, with neither side getting our vote. As they continue to debate inflation and how to manage it, they are failing to do anything about it or even acknowledge what is really going on.
It is concerning enough that the current inflation measures do not reflect the impact on households, savings and the depreciation of the US dollar. It is even worse when the FOMC is discussing whether they should even try and target inflation at all.
Bill Blain of Mint Partners published an email from a reader expressing these very concerns with the FOMC:
On the inflation theme, I got an absolutely classic email y’day from a reader whom I don’t actually know, but had picked up my comments on some financial wire. Thank’s Geoff! His thesis is the global authorities have been spinning us a line when it comes to inflation – pointing out in 1971 it would have taken a low wage worker 2 hours and 10 mins to afford a ticket to the then new Disneyland. Disney prices have experienced 8% y-o-y inflation since the park opened. The same ticket will now require 7 hours and 20 mins work – and they are still playing that damn tune. (The lyrics would almost be profound if the tune wasn’t so inane!)
Geoff went on to point out: “The Indians shamefacedly admit their inflation is 9-13% – they are the only honest country on the planet!”