Meeting Minutes Will Show How Dovish the Fed Really Is

Due out Wednesday, they should indicate policymakers’ thinking on their rate hike pause. 

Let’s see if the newly dovish Federal Reserve policymaking committee is as averse to further rate increases as the stock market believes. On Wednesday afternoon, the Fed releases the minutes of the panel’s meeting three weeks ago, meaning the public will view the details of their outlook.

“It’s hard to imagine the Fed sounding as dovish in the minutes as [Fed Chair Jerome] Powell sounded in the briefing” to reporters last month, Michael Schumacher, head of rate strategy for Wells Fargo Securities, told CNBC. “We do think the minutes will be bearish.” 

Right now, the Fed funds futures show very low expectations of any more interest rate hikes this year. If such projections are right, that would be a significant pivot for the central bank, which boosted rates four times in 2018.

Deutsche Bank economists expect just one more increase this year, in September, and a final one in March 2020. They predict some of the weakening economic indicators will do better in coming months, and inflation will remain muted, with a go-slower Fed policy the ultimate outcome.

The Federal Open Market Committee, at its Jan. 30 meeting, held rates steady and declared it would be “patient” about increasing them in the future. Powell also indicated in his news conference then that the Fed would be flexible about further reducing its $4 trillion balance sheet (down from a peak of $4.5 trillion)—as that shrinkage tends to force longer rates higher.

This news, along with a possible lessening of US-China trade tensions, has helped stocks recover their mojo after the December slide. Investors had dreaded that the Fed would continue raising rates and, due to a softening economy, perhaps plunge the nation into a recession. But since its mid-December low, the S&P 500 has advanced almost 15%.

Regardless of how dovish or hawkish the recent FOMC minutes turn out to be, the big fear is that the Fed will misread the economy and not take the right action. That has happened before.

In 2000, the minutes show that Fed policymakers shrugged off indications of problems among dot-com firms, and ended up having to do an emergency cut of 0.5 percentage point as the tech sector imploded. The same obliviousness occurred in mid-2007 amid signs that the sub-prime mortgage market was disintegrating.

Avi Tiomkin, an advisor to hedge funds, who unearthed these incidents from the FOMC minutes, contended in a recent Barron’s essay that Powell is “continuing the regrettable tradition” set by his predecessors of “blatant detachment from the real economy.”

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