The FOMC Minutes Explained
FOMC Minutes
The minutes were obviously dovish, given the stock market surge, dollar decline and bond rally. They were taken as dovish for three primary reasons:
- First, the FOMC voiced considerable concern about the state of the global economy and the potential negative impact on our economy.
- Second, the strengthening dollar was expressly cited as a potential headwind to growth and to the Fed meeting its inflation target of 2.0% (so the dis-inflation we’ve been talking about).
- Finally, with regard to the FOMC statement, the removal of the “considerable time” phrase (and more broadly, any material alteration of the language of forward guidance) was seen as potentially being interpreted as “hawkish.”
Given the minutes, it was no surprise then that “Considerable Time” and “Significant Underutilization” stayed in the September statement – and it’s clear from the minutes that the FOMC is still much more concerned about the various risks to the recovery. And this is totally trumping any urgency to begin to normalize policy.
The bottom line here is that is would appear the majority of the FOMC is more dovish than we previously believed, and their confidence in the economy remains low. This was a dovish event, and while it doesn’t necessarily mean we’re going to see expectations for the first rate hike pushed out from June 2015, it’s certainly a step in that direction.
From an investment takeaway standpoint, although I don’t think we’re going to see stocks immediately move to new highs, I think we will see money move back into more risky/higher yielding instruments, so as a result if you own SJB I would take at least some profits, and I’m closing out our EUM hedge this morning, as the Fed’s dovish will send money back into lower quality, higher yielding assets in the near term.
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