The Fed released the minutes of its October meeting last week. Because of the holiday, most of us missed it.
But there was some important stuff here that reaffirmed my view of what the Federal Reserve is doing and why.
So here's a look at what the Fed says was said at the meeting – not what was actually said.
The meeting minutes are propaganda designed to get across the Fed's main narrative. The actual words of the participants (supposedly) won't be released until five years hence. The Fed wants you to know what it wants you to know. Usually that's not the same thing as what it actually knows, but it's still important.
As always, its real message is cloaked in doublespeak and obfuscation.
And that message has direct implications for your money (which is why it doesn't want you to understand it).
Fortunately, your trusty Fed watchdog (me!) is here to translate for you…
Reading Between the Lines: Markets Are Not as Solid as They Seem
The first section of the minutes is devoted to a review of the economy prepared by Fed staff economists. They initially noted that inflation, as they define it, remained below 2%.
Here's what the Fed staff said.
- "Total consumer price inflation, as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in September and was lower than early in the year."
Of course, their definition of inflation doesn't include housing inflation, which would increase the index that they follow, the PCE, by about 1%. The PCE uses other suppressive measures as well, which results in an understatement of consumption goods and services inflation. Likewise, the standard "inflation" measures don't include asset prices, as if, somehow, the increase in asset prices is not a representation of inflation.
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Next, the economists looked at the other half of the Fed's congressional mandate – employment. They noted solid trends there, despite the hurricane-related disruptions. Then they noted another inflation measure that better represents general inflation, but which the Fed doesn't consider in its inflation judgment. They also made an excuse for some of the increase, when in fact the impact of that excuse was infinitesimal.
- "Recent readings showed a modest pickup in growth of labor compensation. The employment cost index for private workers increased 2-1/2 percent over the 12 months ending in September, a little faster than in the 12-month period ending a year earlier. Increases in average hourly earnings for all employees stepped up to a rate of almost 3 percent over the 12 months ending in September; however, a portion of that acceleration possibly reflected a hurricane-related reduction in the number of lower-wage workers reported as having been paid during the reference week in September."
Next, the economic staff reviewed the financial markets. Just like media pundits, Fed economists look for reasons that the markets did what they did. Somehow, they always find them and then make pronouncements without a scintilla of factual evidence. This is what we commonly call the market's "narrative." Whether fiction or factual, it doesn't matter. The important thing is that this is what the market manipulators want you to think. You need to be aware of that.
- "Movements in domestic financial asset prices over the intermeeting period reflected FOMC communications that were read as slightly less accommodative than expected, economic data releases that were generally better than anticipated, and market perceptions that U.S. tax reform was becoming more likely. On net, Treasury yields increased modestly, U.S. equity prices moved up, and the dollar appreciated.
There was no discernible reaction in financial markets to the widely anticipated announcement of the FOMC's change to its balance sheet policy.
- " (Emphasis mine.)
The last sentence there is the most important. Traders and investors are ignoring the Fed's plan, now in the early stages of implementation, to shrink its balance sheet and drain money from the banking system. It will do so at an accelerating rate over the next year, reaching $50 billion per month drained from the system starting in October 2018. That's draconian.
As the Fed ratchets up toward that goal, the markets will come under increasing pressure. That's simply because there will be less money around to fuel the demand for investment securities.
The staff then reviewed the market's perceptions of Fed communications. This is a dog-chasing-tail exercise.
- "Communications by FOMC participants were also seen as reinforcing expectations for continued gradual removal of policy accommodation. The probability of an increase in the target range for the federal funds rate occurring at the October-November meeting, as implied by quotes on federal funds futures contracts, remained essentially zero; the probability of an increase at the December meeting rose to about 85 percent by the end of the intermeeting period."
The issue here, as I've repeatedly emphasized, is that the Fed's current method of raising interest rates is not at all restrictive. Market insiders, including primary dealers and big banks, know this.
When the Fed increases IOER (interest on excess reserves), it is actually more accommodative, not less. It's a direct subsidy to the banks that costs them nothing. It lowers their cost of funds and increases their cash flow. It gives them no incentive whatsoever to raise lending rates to borrowers. However, if borrowers perceive that they need to pay more, they'll pay a little more. It's a shell game – useless and beside the point. The only thing that matters here is that the Fed is pulling money out of the banking system and extinguishing it via its program of "normalization" of its balance sheet.
This process has barely started and has had no impact so far, but it will, particularly after January, when the Fed ratchets up from $10 billion per month in drains to $20 billion. Every quarter it will increase that by another $10 billion, so that by next October, the Fed will start pulling $50 billion per month out of the system.
There was a lot more of this meeting – and I'll get the rest of my notes to you before too long – but for now, I want to cut to the most important kernel of the entire report.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.