Via Wolf Street

The Fed introduces a new thingy about “patient” to tamp down on the clamorers on Wall Street.

For the minutes of the FOMC meeting on April 30 and May 1, my fancy-schmancy Fed Hawk-o-Meter more than retraced the spike of the prior meeting, falling 19% from 26 to 21, and is now in the lower range of the red-line zone, indicating that rate hikes are not imminent, but that a rate cut remains off the table. This was confirmed by the use of “patient approach” to cutting rates:

My Fed Hawk-o-Meter checks the minutes of the Fed’s meetings for signs that the Fed sees the economy as very strong and overheating and that rates should rise; or that the economy is strong but not strong enough to raise rates further; or that the economy is spiraling down to where rates need to be cut.

The Hawk-o-Meter quantifies and visualizes what the Fed wants to communicate to the markets by counting how often “strong,” “strongly,” and “stronger” appear in the minutes to describe the current economy in the US. In the minutes of the April 30 – May 1 meeting, released this afternoon, those words appear in this sense 21 times.

To iron out the volatility in the “data,” so to speak, and to clarify the trends, I converted the chart to a three-meeting moving average. By December already, the Fed started backing off its hawkish stance conveyed during the meetings last August, September, and November. Despite the recent drops, the Hawk-o-Meter remains in red-line territory:

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The average frequency per meeting minutes of “strong,” “strongly,” and “stronger” between January 2012 and December 2017 was 7.4 times. The 21 mentions in the April-May meeting minutes represented an increase of 184% from the pre-redline average.

“Strong,” “strongly,” and “stronger” appeared in phrases like these:

  • “Labor market conditions remained strong…”
  • “Total nonfarm payroll employment recorded a strong gain in March…”
  • “A relatively strong increase in defense purchases was offset by a decline in nondefense purchases…”
  • “In response to strong first-quarter earnings at some of the largest U.S. banks…”
  • “Issuance of corporate bonds was strong…”
  • “A number of participants mentioned that they had marked up their projections for real GDP growth, reflecting, in part, the strong first-quarter reading.”
  • “With the strong jobs market, rising incomes, and upbeat consumer sentiment…”
  • “Participants agreed that labor market conditions remained strong.”
  • “Increases in bank capital in current circumstances with solid economic growth and strong profits….”

I weeded out two false positives:

The words “strong,” “strongly,” and “stronger” actually appear 23 times in the minutes, but in two instances, they were used in a context that made them “false positives.” The first was used in the sense of slowing down from a strong pace; and the second described a technical issue in the discussion of the maturity composition of its Treasury securities portfolio. Those two were deducted from the tally:

  • “…suggested that GDP growth in the near term would likely moderate from its strong pace of last year.
  • “…the estimates of the effect of a move to a shorter-maturity portfolio composition on the long-run neutral federal funds rate are subject to substantial uncertainty and are based on a number of strong modeling assumptions.
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 “Patient” about rate cuts.

“Patient” was inducted into the minutes of the December meeting with one mention: “The Committee could afford to be patient about further policy firming.” In the January-meeting minutes, “patient” was plastered 13 times all over the minutes. But in the March-meeting minutes, “patient” was cut to seven mentions. In the April-May-meeting minutes, patient appeared eight times. But one of those was to describe being “patient” about rate cuts:

Many participants viewed the recent dip in PCE inflation as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with…

In other words, Dear Market, stop clamoring for a rate cut just because PCE inflation is below 2%. It’s not going to happen.

According to my fancy-schmancy Fed Hawk-o-Meter, the Fed is trying to tell the markets via these minutes that rate hikes are not imminent and that rate cuts are off the table. There was no “U-Turn,” as the clamorers on Wall Street had clamored for – meaning turning around and going the opposite way. Instead, the rate hikes came to a stop, but might eventually restart; and the QE unwind, after continuing full blast through April, is on schedule to slow down this month and will come to a smooth stop by September. No U-turn either.

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