Fed Minutes Show Fed is Scared to Death of Markets

We blipped up briefly and now have collapsed, giving way to sellers once again. Post Fed minutes, as you can see from the headlines below — the Fed is trapped by markets. They understand inflation is raping the economy but fear by hiking rates they would cause a cataclysmic decline in assets. Ergo, they’re attempting to walk the tight rope.

FED MINUTES: PARTICIPANTS GENERALLY NOTED THAT EXTENSIVE HOLDINGS OF T-BILLS ARE NOT REQUIRED UNDER AN AMPLE-RESERVES OPERATING FRAMEWORK.

FED MINUTES: SEVERAL PARTICIPANTS ALSO MENTIONED ADVERSE RISKS TO THE OUTLOOK, SUCH AS THE RUSSIAN INVASION, A GENERAL TIGHTENING OF GLOBAL FINANCIAL CONDITIONS, AND A PROTRACTED RISE IN ENERGY COSTS.

FED MINUTES: PARTICIPANTS AGREED THAT UNCERTAINTY ABOUT THE COURSE OF INFLATION WAS HIGH, AND THAT INFLATION RISKS WERE SKEWED TO THE UPSIDE.

FED MINUTES: SEVERAL PARTICIPANTS MENTIONED THAT GRADUALLY LOWERING T-BILL HOLDINGS WOULD BE APPROPRIATE BECAUSE THEY ARE HIGHLY VALUED AS SECURE AND LIQUID INVESTMENTS.

FED MINUTES: PARTICIPANTS AGREED REDUCING THE BALANCE SHEET WOULD PLAY AN IMPORTANT ROLE IN FIRMING THE STANCE OF MONETARY POLICY AND EXPECTED IT WOULD BE APPROPRIATE TO BEGIN THIS PROCESS AT A COMING MEETING, POSSIBLY AS SOON AS IN MAY.

FED MINUTES: PARTICIPANTS AGREED THAT THE FED WAS WELL PLACED TO BEGIN BALANCE-SHEET REDUCTION AS SOON AS THE FED’S MAY MEETING ENDS.

FED MINUTES: MOST PARTICIPANTS THOUGHT IT WAS ACCEPTABLE TO REDEEM TREASURY COUPON SECURITIES UP TO THE CAP AMOUNT EACH MONTH AND TO REDEEM TREASURY BILLS WHEN COUPON PRINCIPAL PAYMENTS FELL BELOW THE CAP.

FED MINUTES: MANY PARTICIPANTS REMARKED THAT ONE OR MORE 50 BASIS POINT HIKES IN THE TARGET RANGE MAY BE APPROPRIATE AT FUTURE MEETINGS, ESPECIALLY IF INFLATION PRESSURES STAY ELEVATED OR INTENSIFY.

FED MINUTES: ALL POLICYMAKERS’ ALTERNATIVES FEATURED A FASTER PACE OF BALANCE SHEET RUNOFF THAN IN THE 2017–19 EPISODE.

FED MINUTES: MANY PARTICIPANTS STATED THAT THEY WOULD HAVE LIKED A 50 BASIS POINT RISE IN THE TARGET RANGE FOR THE FEDERAL FUNDS RATE AT THE MEETING.

FED MINUTES: ALL PARTICIPANTS EMPHASISED THE IMPORTANCE OF REMAINING VIGILANT TO THE DANGERS OF MORE UPWARD PRESSURE ON PRICES AND LONGER-RUN INFLATION EXPECTATIONS.

FED MINUTES: PARTICIPANTS LARGELY AGREED THAT IT WOULD BE APPROPRIATE TO PURSUE MBS SALES AFTER BALANCE SHEET RUNOFF WAS WELL ESTABLISHED.

FED MINUTES: SEVERAL PARTICIPANTS BELIEVED THAT THE UPSIDE RISK TO INFLATION FROM THE UKRAINE WAR APPEARED TO BE GREATER THAN THE NEGATIVE RISK TO GROWTH.

FED MINUTES: PARTICIPANTS ALSO EXPRESSED CONCERN THAT, DEPENDING ON ECONOMIC AND FINANCIAL DEVELOPMENTS, A SHIFT TO A STRICTER POLICY STANCE WOULD BE REQUIRED.

FED MINUTES: PARTICIPANTS DETERMINED THAT IT WOULD BE APPROPRIATE TO QUICKLY SHIFT THE STANCE OF MONETARY POLICY TOWARD NEUTRALITY

FED MINUTES: PARTICIPANTS GENERALLY AGREED THAT CAPS MIGHT BE PHASED IN OVER THREE MONTHS, OR SOMEWHAT LONGER IF MARKET CONDITIONS WARRANTED.

FED MINUTES: ON BALANCE-SHEET REDUCTION, PARTICIPANTS GENERALLY AGREED THAT MONTHLY CAPS OF AROUND $60 BILLION FOR TREASURY SECURITIES AND $35 BILLION FOR MBS WOULD BE SUITABLE.