|THE FED’S VIEW ON INFLATION IS MORE FUZZY THAN CLEAR. FOR NOW, DOVES OVER HAWKS.
The Fed speaks on inflation. Crude oil tests downside. Earnings season concludes.
Yesterday’s FOMC offered no major surprise, and none was expected – a draw! That said, the statement (based on the Fed’s meeting July 25-26) gave new meaning to parsing words to indicate no clear majority sits in any camp. Differences among the doves means it’s more than simply hawks vs. doves. “Many” saw some likelihood that inflation might remain below 2 percent for longer than they currently expected. “Several” indicated that the risks to the inflation outlook tend to the downside. “Some other” participants cautioned that easy financial conditions and tight Labor markets could result in ‘overshooting’ the inflation target that could be costly to reverse. This group ‘cautioned’ against a delay in gradually removing policy accommodation.
All 3 key words fall short of more-than-half the 17 members (2 governor seats remain open). But taking many & several together likely adds-up to more than fifty-percent on the dovish side. That includes the Fed chair, given Janet Yellen’s congressional testimony in mid-July. That turned the narrative, and nothing since has turned it back the other way. Worth remembering, even before Humphrey-Hawkins, the updated quarterly forecast downgraded inflation significantly for the 2nd-half of 2017. The committee lowered the estimate by 0.3% to 1.6%, while holding out hope that inflation would return to 2% next year. Though markets have focused on the 3rd rate hike by year-end, we’ve already seen three-in-a-row, with a pause in September anticipated.
Meanwhile, receiving less attention in print, but maybe a contributing factor to this morning’s decline was the Fed’s reassessment of financial stability risks from “notable” to “elevated.” An upgrade in the wording. As per the minutes, Fed officials discussed stock valuations, with a “couple” saying they were supported by ‘favorable macroeconomic factors.’ A couple as in two is a small percent of seventeen.
In general, the central bank appears comfortable with the economy’s trajectory. The 2nd quarter eased any possible concerns of a potential slowdown in the short or medium-term. Indeed, most all economists, well over 50%, do not see a recession looming over the next 12 months. The current odds assessed by most investment houses is 10-15%. Generally, a meaningful number is 30% or higher. So, at least on paper, the U.S. economy is on firm footing.
In market news, equity prices are down in all regions. The Dow is down triple-digits. The Nasdaq more in percentage terms (approx. 1%). Apple Computers topped-out yesterday morning at a new record high, but is down 2% the past 24 hours. WTI and Brent testing the lower-band of the recent range, lowest prices in nearly a month.