What’s the Fed Trying to Say?
My fancy-schmancy Fed Hawk-o-Meter jumped 18% from 22 to 26, after having been on a downtrend for four Fed meetings in a row. Something’s up.
The Fed Hawk-o-Meter checks the minutes of the FOMC meetings for signs that the Fed sees the economy as strong and that rates should rise; or that the economy is OK but not strong enough to raise rates further; or that the economy is spiraling down to where rates need to be cut. It quantifies and visualizes what the Fed wishes to communicate to the markets by counting how often “strong,” “strongly,” and “stronger” appear in the minutes to describe the economy. In the minutes of the March 19-20 meeting, released this afternoon, those words appear 26 times, up 18% from 22 times in the prior minutes:
The average frequency per meeting minutes of “strong,” “strongly,” and “stronger” between January 2013 and December 2017 was 8.7 times. The 26 mentions in the March-meeting minutes were 226% the pre-redline average.
The 18% jump in the March minutes from the January minutes is particularly striking because the Fed had spent the prior four meetings backing off ever so gingerly its bullish assessment of the economy. But in March, the direction changed.
Yet the reading still hasn’t jumped back to the peak levels of last August, when the Fed, with the economy running red hot, was telling the markets that it would raise rates four times in the year.
The current reading of 26 is just above the average over the past 11 meetings minutes of 25.2, starting with the December 2017 meeting, when the Hawk-o-Meter started redlining.
“Strong,” “strongly,” and “stronger” appeared in phrases like these:
- “Labor market conditions remained strong…”
- “Relatively strong increases in real federal defense purchases…”
- “Gross issuance of both investment-grade and high-yield corporate bonds was strong…”
- “Issuance of non-agency CMBS [commercial mortgage-backed securities] remained strong…”
- “CRE [commercial real estate] lending by banks grew at a strong pace…”
- “Credit card loan growth remained strong…
- “Many participants expected consumer spending to proceed at a stronger pace in coming months, supported by favorable underlying factors, including a strong labor market…”
- “Business conditions were favorable, with strong demand for labor…”
- “In their discussion of the labor market, participants cited evidence that conditions remained strong, including the very low unemployment rate, a further increase in the labor force participation rate, a low number of layoffs, near-record levels of job openings and help-wanted postings, and solid job gains, on average, in recent months.”
- “Asset valuations had recovered strongly…”
In the January-meeting minutes, there were three references about the pace having “moderated,” such as, “Growth of business fixed investment had moderated from its rapid pace earlier last year.” Those references to anything having “moderated” have disappeared.
“Patient” gets slashed by 46%:
“Patient” was introduced with one mention in the December-meeting minutes: “The Committee could afford to be patient about further policy firming.” In the January-meeting minutes, “patient” was escalated to a cacophonous 13 mentions. It was all over the minutes in mind-numbing repetition.
But in the March-meeting minutes, “patient” was harshly slashed to just seven mentions. That’s a 46% reduction!
And the potential end of “patient” gets escalated.
Two of these seven mentions of “patient” pointed at potential U-turn, saying that “patient” was not a permanent institution but rather something that might be transitory:
- “Several participants observed that the characterization of the Committee’s approach to monetary policy as ‘patient’ would need to be reviewed regularly…”
- “A couple of participants noted that the ‘patient’ characterization should not be seen as limiting the Committee’s options for making policy adjustments when they are deemed appropriate.”
These two mentions of the potential end of “patient” was an escalation of just one such mention in the January meeting minutes.
It seems, according to my fancy-schmancy Fed Hawk-o-Meter, the March-meeting minutes have a message for the markets: The Fed is back-pedaling its over-reaction to the December market turmoil, now that markets have become euphoric all over again and that credit has become super-easy again.
Then there’s the Fed’s balance sheet. Read… Fed’s QE Unwind Reaches $535 Billion, Balance Sheet Drops to $3.94 Trillion, Old Autopilot Still Engaged