The best thoughts on the Fed minutes come from BTIG’s Mike O’Rourke, who makes two superb points, and ultimately concludes that the Fed board (Mr. Hoenixg excepted) is still in dove mode.
The March FOMC minutes released today provide interesting insight into the thought process of the FOMC. In short, the tone of the minutes was one of a Fed that is very cognisant of the danger of a 1937 type scenario in which support is removed too early. The minutes recited the case made by the doves, who are currently dominating policy. “A few members also noted that at the current juncture, the risks of an early start to policy tightening exceeded those associated with a later start, because the Committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances; in contrast, its capacity for providing further stimulus through conventional monetary policy easing continued to be constrained by the effective lower bound on the federal funds rate.” In essence, the FOMC stated that since it came as close as it could to running out of ammunition during the Great Recession, the Fed better not risk curtailing economic momentum as it begins to build up. The Fed would rather be behind the curve than ahead of it. The language is very reminiscent of the attitude taken during the 2002-2004 time frame.
And bear in mind there was a minor language change the pundits initially interpreted as hawkish, but which O’Rourke is reading as dovish:
Although the “exceptionally and extended” language was not literally dropped by the Fed, it was figuratively dropped when the FOMC redefined it, declaring that a calendar time frame did not apply. “A number of members noted that the Committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.”
And that means…
This reinforces the belief that the Fed does not want to pull any potential policy tightening levers until the very last possible moment, even one as benign as jawboning. Redefining the language indicates that the FOMC plans to keep it longer (if they were planning to drop it, redefining it would only cause confusion). Setting up to drop the language at the next meeting would have not have been inconsistent with market expectations for the earliest potential tightening near year end. There would be little harm in changing the language at the next meeting, except reinforcing expectations that the FOMC sees the potential for rate hikes in late 2010. One might interpret this as an indication that at this time, the FOMC does not want to reinforce the belief of those who anticipate tightening later this year. Overall, these minutes give the impression of a Fed that is notably more dovish than both our and the market’s expectations.
This is probably how the market read the report, as the minutes turned a down day into an up one (basically, the Dow excepted).
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