Folks lining up on both sides of the fence.
My Fed Hawk-o-Meter, applying its analytical magic to the just released minutes of the June 18-19 FOMC meeting, dipped by one point to 20, hovering now in the lower range of the red-line zone, indicating that a rate cut is moving closer as a possibility but is not yet a clear decision:
My fancy-schmancy Fed Hawk-o-Meter analyzes the minutes of the Fed’s meetings for tell-tale signs that the Fed sees the economy as very strong or overheating (rate hike); as strong but not overheating (rate unchanged); or as spiraling down (rate cut).
It attempts to clarify in a quantitative and visual manner what the Fed wants to communicate to the markets for the next meeting. The Hawk-o-Meter does so by counting how often “strong,” “strongly,” and “stronger” appear in the minutes to describe the current economy. In the minutes of the June 18-19 meeting, those words appear in this sense 20 times, down from 21 times in the prior meeting minutes.
The three-meeting moving average of the Hawk-o-Meter reduces the volatility in the “data” and clarifies the trends:
The average mentions of “strong,” “strongly,” and “stronger” per meeting minutes between January 2012 and December 2017 was 7.4 times. The 20 mentions in the June meeting minutes represented an increase of 170% from the pre-redline average.
“Strong,” “strongly,” “stronger” appeared in phrases such as these:
- “The information available for the June 18–19 meeting indicated that labor market conditions remained strong”
- “Federal government purchases were being boosted by strong increases in defense spending”
- “Gross issuance of corporate bonds was strong in May”
- “Issuance in the institutional syndicated leveraged loan market was subdued in April but rebounded in May, reflecting strong issuance beyond that associated with refinancing of maturing leveraged loans”
- “A couple of participants, however, pointed to signs that investment might pick up, including reports from some contacts that their orders and shipments remained strong and that some contacts planned to hire more workers”
- “Consumer spending had been solid, supported by a strong labor market and rising incomes”
- “In their discussion of the labor market, participants cited evidence that conditions remained strong”
- “Reports from business contacts pointed to continued strong labor demand, with many firms planning to hire more workers”
- “While strong labor markets and rising incomes continued to support the outlook for consumer spending…”
- “The Committee retained the characterization of the most likely outcomes as “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective” but added a clause to emphasize that uncertainties about this outlook had increased.”
I scrubbed two false positives:
The words “strong,” “strongly,” and “stronger” actually appear 22 times in the minutes, but in two instances, they were used in a clearly different context that made them “false positives,” and I scrubbed those two from the tally:
“Total nonfarm payroll employment expanded solidly, on average, in April and May; however, job gains slowed sharply in May after a strong increase in April.”
“Some participants suggested that although they now judged that the appropriate path of the federal funds rate would follow a flatter trajectory than they had previously assumed, there was not yet a strong case for a rate cut from current levels.”
That was quick: “Patient” disappears.
And the new key word, “patient,” introduced with such market-moving oomph in December, has essentially disappeared, after having been used in the minutes of the prior meeting to indicate, interestingly, that the Fed would also be patient with rate cuts. The word seems to have served its purpose and is being retired. It was mentioned only once, and only to show that the word would be “removed” from the language, in this sentence that is also interesting for another reason:
“In describing the monetary policy outlook, members agreed to remove the “patient” language and to emphasize instead that, in light of these uncertainties and muted inflation pressures, the Committee would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
The above sentence also expresses the Fed’s intention to watch the data before moving on rates, and that there were not yet any foregone conclusions: Additional weak data could push them one way; additional strong data could push them the other way.
Where is the Fed’s “U-Turn” that Wall Street promised us? Read... Fed Sheds $38 Billion in Treasuries and MBS in June, Dumps MBS at Record Pace, Exceeding “Cap” for First Time
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