Fed Minutes

The Fed announced their plans today to
“only invert the Yield Curve somewhat,” rather than the deeper and more
extensive inversions some traders feared.

The minutes revealed a debate between the
two camps: The Hawks wanted to invert the Yield curve extensively, while
another, more dovish group only wanted to see the flat curve inverted more


UPDATE:  January 4, 2005  6:13am

Front page WSJ article states "Fed officials are less worried about inflation and thus may be nearing an end to their campaign to raise rates, minutes of their December meeting suggest."

Joanie has a very different take on both the minutes and the markets reaction:

"I read it in its entirety.  Quite boring, as a matter of fact; nothing new at all.

They say that the economy is on solid ground across the board, the only slight slippage mentioned at all was a mention of a bit of cooling in housing. Employment and output are right up there and inflation, of course, remains in check.

The minutes go on forever, rehashing a lot of stuff we have known for eons. Some think we need more tightening, but there is no consensus as to how much. Bottomline, they are monitoring the data carefully. And will act accordingly.

Look. We knew all that; a couple or so more and finito. I found the minutes totally uninspiring and lacking in any detail that is not already well hashed out in the press.

HOWEVER:  The tape says that they were dovish.

But here’s the biggest question of all:  It took me a solid 20 minutes to read that junk all the way through as it doesn’t quite read as easily as the Daily News.  So can you please tell me how they put the pedal to the metal at precisely 2 p.m.?  I mean, you couldn’t even get on the website to read it that fast.

Bottomline:  Earlier, we came within .30 of putting in a Oitside Down Day.  They rallied here because they could. The minutes are the excuse."

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What's been said:

Discussions found on the web:
  1. DG commented on Jan 3

    The thing is, whether its momentary, or more lasting, an inversion is never a good sign, and one that surely fortells a general slowdown.

  2. MPM commented on Jan 3

    To me this smacks of desparation and shows a Fed/Administration bent on extending the good times as far into 2006 as possible. Or is this just “Helicopter Ben” showing his stripes? Anyway, the gold markets sure liked the news and the miners were up 6-10% today.

  3. Max commented on Jan 3

    A more flat yield curve of the benign Fed scenario will not be very good for the carry traders in the financial industry.

    And if todays markets are any indicator, the winners continue to be the resource producers.

    Unless housing rebounds or another asset can be found for the US consumer to lever, consumer spending may be headed to the tired section.

  4. Blackwood commented on Jan 3

    They’re going to have to face a recession sooner or later. They may have just pushed the ineviatable too far into the future.

    When the recession does hit, there’s now a good chance that the economy won’t recover by the 2008 election.

    I’ll be 1992 all over again, when Bush 41 stimulated the economy too late for the effect to filter through in time for his election, but instead it bumped four months afterwards. Liek father, like son.

    Whoever the hell comes into office in 2008 will see a nice rise from the too-late-for-the-election recovery without having to lift a single finger.

  5. Trent commented on Jan 3

    Blackwood’s comment appears to suggest that any recession is completely controllable by the Fed. If that were the case, why have one at all?

    “They’re going to have to face a recession sooner or later. They may have just pushed the ineviatable too far into the future.”

    So, is it inevitable, or can “they” control when it occurs?

  6. vfoster commented on Jan 3

    it seems like it will be hard for the Fed to stop raising rates if gold is screaming to new highs and the dollar is falling, like what happened today. this is setting up as a showdown with Bernanke and the global markets.. real inflation is priced in the FX market and the value of the dollar is even more crucial today with the amount of debt we have piled onto foreign central banks.. during the first puke fest (2001-2003), the Fed was trying to de-value the dollar. now, i wouldn’t think that would be a desirable outcome and Bernanke may have to keep raising to defend the dollar and cool off the rally in commodities.. the recent gold rally hasn’t made a lot of sense in the face of a strong dollar and rising real interest rates. but after today i think gold is rallying because the market doesn’t trust the new Fed chairman to do what is necessary.. seems like they are daring him to not raise rates..
    the dow priced in gold was actually slightly down today, which lets you know what kind of rally we had..

  7. Norman commented on Jan 3

    The Fed’s comments that the 2005-4Q stock market rally was a sign that the economy was strong and and welcomed tells us that they do not view extraordinary asset values relative to personal disposal income as a future negative to be dealt with. The Message: If Core CPI behaves rate increases will stop, soon.

  8. MPM commented on Jan 3

    If the Fed comments that the stock market move means the economy is strong that is like saying because I weigh less I must be getting fitter. Possibly but not the only explanation and they know it. And since when does the Fed become market cheerleader anyway? All in all it seems suspiciously like puffery to me.

  9. Jack K. Miller commented on Jan 4

    You guys need to remember the economic rule that supply meets demand at a price.

    Gold and other metal prices are high because there is an ongoing and pending super boom in the production of hand held electronic products. These products are being made at ever more incredible rates of efficiency. I understand that INTC is now annually making about $500,000 worth of product for every employee, right down to the accounting clerks!

    The prices of the finished products are going down! How can these discussions go on and on about inflation when it is obvious that the price of the raw materials is not being passed through to the consumer? Productivity, in China in particular, has averaged extraordinary rates for the past many years. Even the price of much antique furniture is declining because one can buy brand new furniture for half the prices offered 10 years ago.

    Bond yields are low because inflation is low. Again, remember the rule, companies are generally generating more than enough cash to supply their financing needs. Companies do not need to issue bonds; the supply is declining, so the price has been rising.

    We just witnessed the record year for stock buy-backs. Most companies with outstanding debt can buy back debt to save the interest payments; they can do even better buy buying back shares that are earning higher profit margins than the interest rate on the bonds. Again, remember supply and demand because the more shares bought back the higher the demand and the lower the supply, therefore the higher the price. The New Year started today with more buy-back and buy-out activity, you might want to grab hold to some shares and enjoy the ride.

    The flat yield curve is every bit as much a forecast for lower interest rates as it is a forecast of a slower economy. I am not saying that the sizzling GNP growth will not slow, but I know it is possible that the inflation rate will slow by the bigger percentage. As Barry’s yield curve charts posted a while back showed, inversions, especially just for part of the curve and for just a few days, does not tell much of a story. Today, the inversion disappeared completely because short rates fell more quickly than long rates.

    The recession you refer to is probably at least another four years away; partly because, the pending electronics boom will stimulate growth, employment and eventually inflation. The FOMC is working hard to stay ahead of inflation expectations but we all know that when the boom goes full tilt bozo it will be virtually impossible for the FOMC to stay on top without causing the bubble to pop.

    Consumer spending is never “the” driving force during the expansion phase of the economic cycle. Business spending is headed up for sure. One example is the 12 oil refineries that are planned or under construction around the world. The costs of these will average around 3 billion dollars each. Thirty-six billion dollars is enough to finance the construction of 180,000 two hundred thousand dollar homes. Throw in the construction of a few hundred power plants and a couple of thousand new giant drilling rigs and you have a capital spending boom cranking up that will replace a whole lot of home refinancing.

    Besides, wage increases will pick-up as the expansion moves into high gear. The median age of all the people who live in all the developed nations is now right at 46 years. Forty six years happens to be the peak average spending age. There is no need to fret over consumer spending until the baby boomers start retiring in mass. The oldest boomers are turning 60 this year but the big bubble is at least five years from retirement.

    The FOMC did what it needed to do today; it talked out of both sides of its mouth to buy time. The FOMC needs to adjust to what central bankers do in Europe and around the world. There is also a major psychological game being played. It is the fear of not knowing how high rates will go that is doing the most work to hold inflation down. Based on the flatness of the yield curve, the need to raise short rates is at least temporarily nearing the end.

  10. MPM commented on Jan 4

    Okay I have now read the full minutes and I agree with Joanie that THERE IS ABSOLUTELY NOTHING NEW THERE. All the characterizations and paraphrasing we have heard are pure spin. No dovishness, no new policy, no statements about market rises meaning economy is strong. These are all secondhand accounts with an agenda. This market run up happened last time on the same kind of spin, ie that removal of the Phrase ‘policy accomodation” was somehow dovish. No, it reflected the fact that rates were now in a zone that indicated neutrality not accomodation.

  11. D. commented on Jan 4

    “Consumer spending is never “the” driving force during the expansion phase of the economic cycle.”

    Never is a strong word. Didn’t we get a quarter of 8% growth and a couple of years of strong GDP growth on the back of huge consumer consumption????

    “Gold and other metal prices are high because there is an ongoing and pending super boom in the production of hand held electronic products”

    Bling is in, diamond ring sales are up more than 40% YoY. There’s probably more gold in rings than in your handheld devices.

    Now seriously, demand is peanuts vs. worldwide gold inventories.

    “Even the price of much antique furniture is declining because one can buy brand new furniture for half the prices offered 10 years ago.”

    Once again bling is in. Fake antique is better than real antique!

  12. vfoster commented on Jan 4

    Gold and othe metals/commodities are high because the Fed inflated to stop the stock market from crashing in 2003. Every single asset class bottomed in 3/03 when we went into Iraq which coincided with falling dollar and a recession, not a production boom. if commodity prices were so sensative to a production boom then we would have seen this rally occur in 1999 on the Y2K production boom not in the midst of a recession. The Chinese demand story driving up commodity prices is a myth and more of a function of supply-side economic policy. The Chinese have been manufacturing products for longer than 3 years (the duration of the commodity boom) but the government’s supply-side policy was peaking in 2003 when we passed massive tax cuts and took the federal budget from a surplus to deficit. oh yeah, the Fed supplied negative real interest rates for a couple of years during the same time frame.. that’s also kind of bullish for commodity prices.
    prices are set at the margin and supply and demand drive the price action, but what drives the supply/demand dynamics is the issue. excess liquidity, multiples, economic/earnings growth and motivation like the old fear and greed are dynamics that set prices.
    a company buying back stock doesn’t support the stock price by sopping up supply, they are rarely large enough to support the liquidity of that particular trading day much less over time. if you’ve ever traded and seen a company get hit on a block of stock only to see the price collapse you wouldn’t feel so good about stock buybacks. stock buybacks are more about decreasing shares outstanding to boost the eps growth, not because it’s as superior capital investment..in fact may of these “activist shareholders” are forcing companies to borrow more money to buy back stock to lower their cost of capital. this by the way will eventually drive corporate bond spreads wider, raising cost of capital. bond spreads are low because companies have a shit load of cash due to supply-side policy, which is ironically inflationary. spreads are tight because of inflation not because there is no inflation, this is the same reason we have low/negative risk premiums.
    if you are banking on business spending to pick up the slack for a weak consumer, my bet is you will be disappointed. my guess is that corporations will continue to pay dividends and buyback stock before they hire and spend… on the INTC example, their return on capital is falling while their cost of capital is rising.. not a prescription for a cap ex boom.

  13. spencer commented on Jan 4

    Standard procedure for many economic releases is to give the information to reporters on site about 30 minutes beforehand but to embargo their comments until the release. This gives them time to evaluate the release and write their story and headlines before the data is released. Do not know if this is done for the minutes, but presume it is what happens here. This is why they can get a headline on the tape immediately after the release.

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