My “Fed Hawk-O-Meter” Speaks

Wall Street’s hope for a dovish Fed may not be entirely fulfilled, it seems.

Wall Street has been abuzz about a “dovish” turn by the Fed — or even a “U-turn.” So, today the Fed released the minutes of the FOMC meeting on December 18-19, during which it voted for the fourth rate hike in 2018, and the ninth in this cycle, bringing its target for the federal funds rate to a range between 2.25% and 2.50%. The WOLF STREET Fed hawk-o-meter checks the minutes for signs that the Fed believes the economy is strong and that “accommodation” needs to be further removed by hiking rates.

The hawk-o-meter measures how many times the minutes use the word “strong,” “strongly,” and “stronger.” In the December meeting minutes, released this afternoon, the mentions of “strong,” “strongly,” and “stronger” edged down for the third meeting in a row, this time by two points, to 25. But even in this range, the hawk-o-meter is still redlining:

There was one fake strong, so to speak, in the minutes, which happens occasionally, and I removed it from the tally. But this one was interesting because it showed what some or the Fed’s new concerns are: “Equity markets in AFEs [advanced foreign economies] posted notable declines, and Europe-dedicated bond and equity funds reported strong outflows.”

The average frequency of “strong,” “strongly,” and “stronger” between January 2013 and December 2017, before the hawk-o-meter started redlining, was 8.7 times per meeting minutes. In the December meeting minutes, the 25 mentions were still 187% higher than that non-redline average.

The average over the past six meeting minutes when the hawk-o-meter redlined (May, June, August, September, November, December) inched down to 28.7 times (from 29.4 after the November meeting).

“Strong,” “strongly,” and “stronger” appeared in phrases like these:

  • “Real GDP growth was strong”
  • “Job gains were strong”
  • “Household spending continued to increase at a strong pace”
  • “CRE [Commercial Real Estate] loan growth remained strong at banks”
  • “With some stronger-than-expected incoming data on economic activity”
  • “The staff continued to expect that real GDP growth would be strong in the fourth quarter of 2018, although somewhat slower than the rapid pace of growth in the previous two quarters”
  • “The labor market had continued to strengthen and that economic activity had been rising at a strong rate”
  • “Participants generally characterized real PCE [Personal Consumption Expenditures] growth as remaining strong”
  • “The economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee’s objective.”

There were also references to “moderated,” for example:

  • “The pace of gross equity issuance through both seasoned and initial offerings moderated, consistent with the weakness and volatility in the stock market”
  • “Growth of business fixed investment had moderated from its rapid pace earlier in the year”
  • “Reports from business contacts and surveys in some other Districts suggested some moderation in inflationary pressure”
  • “Though financial conditions had tightened and global growth had moderated, members generally anticipated that growth would remain above trend”
  • “Gross issuance of corporate bonds also moderated in November, driven by a significant step-down in speculative-grade bond issuance, while institutional leveraged loan issuance also slowed in November.”

And a new world: “patient.”

The minutes introduced a new phrase that Fed governors have in recent days also used repeatedly in their speeches: “patient” – as “many participants” thought that the FOMC “could afford to be patient about further policy firming.”

They’re going to let the dust settle before hiking rates further in order to assess:

  1. “How the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity
  2. The effects of past rate hikes “which were likely still working their way through the economy.”

That last phrase concerning the effects of the past rate hikes “still working their way through the economy” refers to the well-documented lag between changes in monetary policies and actual tightening of financial conditions.

But future rate hikes are not off the table.

Changes in monetary policy have no impact unless they’re transmitted to the markets. This transmission takes time. In a rate-hike cycle, the policy changes are being successfully transmitted once “financial conditions” begin to tighten. This shows up, for example, in widening spreads between Treasury yields and junk-rated corporate bond yields. Historically, the lag was 12-18 months. But in this rate-hike cycle, the lag was around 32 months. So, from this point of view, it’s better to wait until the new scene fully unfolds.

But future rate hikes are not off the table. FOMC meeting participants “generally judged that some further gradual increases” would “likely” be appropriate. Yup, that hawk-o-meter is still redlining, just a little less so.

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  36 comments for “My “Fed Hawk-O-Meter” Speaks

  1. Jdog says:

    The reason the spreads are widening is that the zombie companies who only keep the doors open by being able to refinance are becoming desperate. The credit buying cycle is exhausted and inflation is turning break even spreadsheets into losses. Cheap interest has allowed debt balances to grow beyond their ability to be serviced. Halting the increase in rates at this point will not stop what is coming, it will only delay it slightly.

  2. Forget about it says:

    I think Wolf will be proven wrong before the summer, the QT will be reversed and we will have a rate cut by that time. Powell totally and spectacularly folded to Wall Street last Friday proving once again that the Feds only and main purpose is the welfare of Wall Street while paying lip service to the absurd objectives of price stability and employment.
    Is it really price stability when fed objective of 2% inflation doubles the price level every 25 years? If wages don’t go up by same amount this looks more like manifest theft.
    Then look at the 10year yield, going by wolf’s understanding of the fed we should be on the 3.5% range by now. I expect unother frenzy on the real estate markets this spring if the mortgage rates keep sliding and probably Dow to 30k if the fed doesn’t hike in March and slows down the QT.

    • Stockolio says:

      LOL you are in space and do not trade… There are some serious plays made in Oil and HY Bonds right now, who do you think is buying all the oil and junk bond ETF’s right now, and more precisely, why are they furiously buying both right now ? Look at PUT contracts being bought, it is insane the amount being bought since the year started

      I agree they will stop tightening and cutting rates likely in September, but only cause havoc in the credit markets will have spilled over everywhere and things are critical at that point… You do not understand the destruction coming in the bond market, markets will not go up for a while once defaults start regardless of QE5 in end of year, PG&G is the start, imagine once GE and AT&T get officially down graded to junk ?

    • van_down_by_river says:


      I’m braking my promise not to post anymore but I couldn’t help myself. Given Powell’s statement about being flexible with the balance sheet (oh man – that’s a scary statement) and the history of the Fed over the last 35 years I would not be surprised by news that the Fed has started once again purchasing treasuries. Powell appears to be a coward equal to his recent predecessors.

      Your post was pot on – well done!

      Ok, back under my rock.

      • Howard Fritz says:

        Nice to see you again van down by the river don’t let Wolf get you down, just because you disagree on QE.

    • rhodium says:

      Go read Hussman. Until qt is quite obviously reversed back to qe you will have a tremendous downward bias in asset prices of all sorts since it was the massive expansion of non-yielding “hot potato” money that has to be held by someone at all times that incentivized investors of all types to go headlong into assets. Just stopping the increase in interest rates and holding steady won’t stop the slide, and even if qt was halted, enough psychological damage may have been done to confidence at this point that markets would continue down, especially if any of the economic weakness showing up in other countries shows up in the U.S. many overindebted corporations will be staring into the dark expanse of a downward spiral.

    • Austin says:

      I like you. :)

      • Austin says:

        Can’t fault Wolf for having a little faith in the integrity of the Fed. I agree. The FED will fold. Money will be printed. Wall Street will get more money to borrow for free to gamble. Corporations will continue to borrow for free to buy their own shares on the open market.

        This is the New America.

        • Wolf Richter says:

          I have zero faith in the Fed :-]

          I’m just trying to read the tea leaves to figure out what it will do.

        • Mugsy777 says:

          Has everyone forgotten that the whole charade is and always has been a doomed government subsidy by central banks of financial assets…it’s only when, not if, sovereign debt and world currency markets collapse…maybe the fed knows the gig is up …..doesn’t matter if they backtrack now….ten years of propping up the banks will end in what? I may be off by a month, year, or even years, but not about how this ends…the sooner this stops the better for Future generations.

    • Kasadour says:

      Completely agree with your assessment.

      I personally think Wolf puts just a little too much faith in the FED’s policy declarations, but to his credit he’s been correct so far. But most of us that have been around this site, and others, long enough (me, five years give or take) know the FED’s priorities will eventually be demonstrated by a monetary policy reversal ie reverting to another round of QE when “something big breaks”. We all know it. Wolf knows this too.

  3. Old Engineer says:

    The shocking thing to me has been to learn how little actual “capitalism” there is in the U.S. stock market. Clearly the values of stock in the stock market (ie stocks overall) are almost entirely dependent on the whim of the U.S. government. Either directly through interest rate and tax liability manipulation or through the increased use of privatization of government activities and revenue farming.
    I’ve had to eat my words before but I think they will slow down as the pressure from the falling stock market will be difficult to resist. To most people the stock market is synonymous with the economy and populist fear mongering politicians at the behest of the listed companies will attempt to instill panic in the general population to force the Fed to back off.

    • endeavor says:

      I think the only capitalism left in the country is the small business, sole proprietor, bootstrapping kind. Sure, there are lots of corporations still in many sectors but they work like shared monopolies. Telecom, insurance, etc. Ever notice now that when sales drop they raise prices to skin their remaining customers rather than cut prices to grow customers.

    • Stockolio says:

      Clearly the values of stock in the stock market (ie stocks overall) are almost entirely dependent on the whim of the Credit Markets

      Fixed it for you ;)

    • Keeper Hill says:

      I’m with you. I think the next move will be a cut.

    • “When” the Fed cuts depends on how fast the markets and indicators crash. They’re certainly not near the “cutting” place yet, since they still lack dry powder. This is a unique bubble, in that every class of asset in which the rich invest is in stark and extreme bubble territory. Diversification WILL NOT WORK this time. The playing field will move back to “more level” from the top side down (though certainly not anywhere near actually level, in part because Main Street will also be hurt). My inexhaustible optimistic streak hopes for an economy more like the 1950s the next time around. (In the meantime, I’m staying in gold, as I’ve already mentioned — my 16-year “safe” place.)

  4. Paulo says:

    Today Trump gushed over and over about the stock market, jobs numbers, and the strong economy; the strongest the World has ever seen…most likely. :-)

    Can’t have it both ways. If everything is so great then why not raise interest rates? And taxes on the rich, too. :-)

    From Wiki:
    “Following World War II tax increases, top marginal individual tax rates stayed near or above 90%, and the effective tax rate at 70% for the highest incomes (few paid the top rate), until 1964 when the top marginal tax rate was lowered to 70%. Kennedy explicitly called for a top rate of 65 percent, but added that it should be set at 70 percent if certain deductions weren’t phased out at the top of the income scale”

    If I remember the old Opie Happy Days movie, I’m pretty sure those times are what everybody seems to pine for in today’s current climate. Interest rates are currently still below the rates of the Happy Days decade, that time when everything was supposedly better.

    An economy or Market that crashes when interest rates rise such a small amount, or crashes at the merest whiff of rising rates, is not healthy.

    • Cashboy says:


      You state “Interest rates are currently still below the rates of the Happy Days decade, that time when everything was supposedly better”

      You forget asset prices (prices of houses, cars etc.) are much much higher than they were back in those “Happy Days”.

      Lower interest rates do help a bit with reagrd to that.

      However, wages/earning/income is much lower in relation to those assets.

      Therefore in real term we are indeed in Misserable Days.

  5. IdahoPotato says:

    In December they said:

    “The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

    Now they say:

    “especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming.”

    Which is it?

    • HR01 says:


      “Which is it?”

      Why both, of course. Same old bad cop/good cop routine.

      Agree with Wolf though. Nothing’s changed at all. Just simple jawboning, which is all the algos have left. QT on auto-pilot.

      All we’ve seen since Christmas is a technical bounce but won’t label it as ‘normal’. The decline had been orderly. The latest ramp jobs anything but. Expecting a more dis-orderly process to unfold.

  6. timbers says:

    By the Fed’s own standard, interest rates are below neutral – they are stimulative.

    “Hawkish gradualism” is just another term for dovish. Will “gradual” be the norm if/when the Fed decides to cut rates to fight recession? “Gradual” might disappear from Fed vocabulary if stocks tank so it can slash rates “rapidly”.

    Low rates have not addressed the issues that have created our weak “strong” economy, and keeping them low won’t help the economy, it will hurt more, in the same way low rates have hurt the economy these past 10 years.

    You can’t have it both ways – either Fed rates are below normal, or not. There is simply no reason – none – for taking 3 years to “hawkishly gradually” raise rates, then keep them below neutral…all while bubbles grow bigger.

    The Fed has found reasons to give free money to the ultra rich and Wall Street for at least 10 years now. Powell is just the latest incarnation.

    To re-iterate, while it is not certain the Fed will again do QE, the odds of it doing have increased IMO due of Fed actions having took so very long time to increase rates a little bit, thus leaving too little room to deal with a normal recession most of us are old enough to have experienced.

    Unless of course the Fed is hallucinating it could do negative rates to fight future recessions.

    What do you expect from a person like Powell, who is so badly informed/dishonest he claims programs that have dedicated self funding revenue streams – like Social Security and Medicare – are making deficits worse, and by omission tells us the Military it not at all causing deficits?

    • John Taylor says:

      Fed rates are going up so slowly partly because of “QT”.

      I think the gradual approach makes sense, considering that the ECB & BOJ have negative rates, and China has its own way of being accommodative.

      If we ditched QT and doubled the interest rate increases, the interest rate spread would cause a much bigger dollar rally and suck more liquidity from elsewhere. As it is, QT helps tighten things a bit more here without the large rate spreads.

  7. Here is the case that QT is like ten rate hikes. ( I don’t think anyone knows but it does have an effect) “Central Banks have an outsized-effect in deregulated financial systems, where retail deposits are not the sole funding source, because what matters most is the ability to re-finance positions and at the margin Central Banks are the marginal suppliers of liquidity.”
    CB’s provide liquidity for shadow banking, and is the Fed a true Central Bank (no). He then goes on to explain the role of MM, which he seems to have missed the Feds role in adding to MM reserves, which are a source of liquidity (to everybody). Traditional banks are now GSEs, end game for impaired securities, which is why the analysts love them, and why right thinking people hate them.
    If Fed’s “real rates” are 5%, (and the Fed keeps hiking as Wolf {the human algo} suggests, according to their language, then GDP should grind to a halt pretty soon, and by extension inflation should double. If you agree with this premise, you have to consider we are in a deflationary vortex acerbated by more Fed rate hikes?

  8. Iamafan says:

    Relax and have another drink, rates are not that bad yet.

    • Wolf Richter says:

      Lamafan — and everyone else:

      Please don’t dump links on this site. Describe and summarize what you’re trying to say in a couple of paragraphs, and if you need a link to prove it, you can add it at the bottom. The purpose of this sit is NOT to promote other sites or send readers to other sites. I deleted the link, as I normally do when I read a one-line tease and a link.

      But lamafam, you’re encouraged to summarize your thoughts here on the topic.

  9. Michael says:

    I believe Wolf is correct. However, raise rates or cut rates the market goes down.

  10. Laughing Eagle says:

    Wall Street wants to control what the Fed does. If it does not like what the Fed does it crashes the stock market to force the Fed to change its course.
    Wall Street crashed the market in 2008 when the Congress did not pass the bailout plan. Fed being independent. Only if Wall Street agrees, not any political pressure. The stock market is all a joke. My money is not where these guys play their crying game.

  11. Maximus Minimus says:

    I am sure, the FED is well aware of the Wolf Street “Hawk-O-Meter” (and maybe the algos), and adjusts it’s minutes accordingly.

    • Wolf Richter says:

      Been wondering about that :-]

      In that case, my hawk-o-meter would become one of their communication tools. The minutes already are a communication tool. But the minutes are nearly impossible to read. They’re the most repetitive and mind-numbing prose out there, as if there were designed NOT to be read — except by algos, such as the hawk-o-meter.

  12. panamabob says:

    I love your hawk-o-meter even though it has no effect on my well being since I’m out of all risk. It’s just a cool indicator of the extant of propaganda in the USA. You finely parse the truth of the FED’s proclamations for what they are,…divergence from reality. It’s really about keeping the party going and the music louder with more missing chairs every day.

    • RD Blakeslee says:

      I also think highly of Wolf’s unique (downright cute!) new indicator.

      Back when I was in government, my colleagues and I used to look for “weasel words” in government pronouncements. “Patience” incorporated in Wolf’s indicator, would have been one.

    • With rising inflation, what is your strategy for being out of all risk, panamabob?

      I’ve been in gold for 16 years, which works for me, but it’s no secret that even goldd isn’t risk free (Wolf has commented on this in the past).

  13. Nate says:

    If the Fed keeps withdrawing liquidity via QT the long term direction for the market seems most likely to be down or sideways. Maybe that last is what they’ll be trying to acheive manipulating the interest rates. Doubt doing both at once is a very good idea…unless you like market crashes…

  14. Jdog says:

    Interest rates are secondary to QT. So long as the Fed continues to let holdings roll off, the affect is money destruction which is deflationary.
    Everything must follow the laws of supply and demand.

  15. And a new word(?): “patient.”

  16. You may have the only discussion board on the internet that is actually worth reading, Wolf…. You have role-modelled what moderators should do, and you’ve proven it works.

Comments are closed.