Fed Hawkish – FOMC Minutes

FOMC Minutes from the September 25th to 26th meeting were released at 2:00 PM on Wednesday.

The Minutes stated, “Participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term”.

This is a ‘status quo’ statement. Since the Fed has been hiking rates steadily, status quo means the Fed will remain hawkish.

The media presented the Minutes as a surprise given President Trump’s criticisms of the Fed. His criticisms are irrelevant to monetary policy. That is unless he’s going to replace a member or add members based on a new philosophy.

It’s better to present continued rates hikes as I have which is that they are coming despite recent weak inflation reports.

The Fed appears to be getting as hawkish as the economy and stock market will allow it to regardless of inflation.

Even though the Fed reacts to the stock market, it’s too early in this correction for the Fed to change course.

Stocks need to fall about 12.5% for a rhetoric change to occur. Since this correction started in October, there would be no way for the September Minutes to include a reaction to the decline anyway.

Fed Hawkish – Citi Inflation Reading Falling

As you can see from the chart below, the Citi inflation basket disagrees with the breakeven inflation rate.

It is closer to the latest inflation readings which show weak momentum. Citi inflation reading is based on 250 equities which were put in an index to track inflation.

The inflation basket was highly correlated with the 10-year breakeven inflation rate from mid-2015 to mid-2018.

In the past few months, it has been cratering. This is food for thought as we await the September PCE report which comes out Monday, October 29th. The prior core PCE report showed core inflation of 2%. I’m expecting 1.9% growth.