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'Dovish' Fed Admits Inflation Weaker, Says Balance Sheet Unwind To Start "Relatively Soon"

With 'zero' expectations for a rate-hike today, all eyes are focused on any shifts in The Fed's balance sheet normalization timeline ("balance sheet unwind to start relatively soon") and its most-recently-dovish inflation outlook (following the weak June CPI print, The Fed now says "inflation seen rising to 2%" but is weaker").

Key takeaways from FOMC:

  • Balance sheet reinvesting to continue `for the time being,' normalization plan to begin `relatively soon'
  • Headline and core inflation `have declined,' and the word `recently' after this phrase from the June statement is omitted today
  • Inflation running below 2%, the descriptor tweaked from the `somewhat below' in the June statement
  • No dissents

Additional headlines

  • Fed holds rates unchanged, repeats inflation seen rising to 2%
  • Fed: labor mkt strengthened, activity rising moderately
  • Fed: job gains have been solid, unemployment has declined
  • Fed: household spending, fixed investment continued to expand
  • Fed: overall and core inflation declined, are running below 2%
  • Fed repeats mkt-based inflation compensation gauges remain low
  • Fed repeats survey-based inflation measures little changed
  • Fed repeats inflation to stay ‘somewhat below’ 2% in near term
  • Fed repeats risks to outlook appear ‘roughly balanced’

Expectations were The Fed will reveal the timing of its balance sheet unwind in September and wait to hike interest rates again until December.

Note that loss of the word "recently" before the language around inflation declining. That's relevant. It nods at the fact that the dip in inflation has been more long-lasting.

Intriguingly, The ECB decided to shake up the market just minutes before The Fed's statement...

  • *NOWOTNY: EURO-AREA GROWTH HAS IMPROVED BUT INFLATION LAGGING
  • *NOWOTNY: ECB MUST RECONSIDER POLICY WITH DEFLATION RISK GONE
  • *ECB'S NOWOTNY SEES RISK OF DISTORTIONS WITH NEGATIVE RATES
  • *ECB'S NOWOTNY SAYS AGREES WITH WEIDMANN WHO SAID THIS IS TIME TO SLOWLY GO OFF GAS
  • *ECB'S NOWOTNY SEES NEED TO DISCUSS TECHNICAL ASPECTS OF QE END

Which sent the USD lower...

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Rate-hike odds for July have been zero for almost two months...

 

Notably the Fed Balance sheet really starts to shed assets in August (double July's) then accelerates again in November bigly...

 

Since The Fed hiked rates, 'hard' data has continued to weaken (even relative to marked-down expectations) as 'soft' data has bounced hard...

 

Since the June rate-hike (and The Fed's warning about stretched valuations), the S&P is higher and bonds and bullion are down (equally)...

 

But the dollar has done nothing but freefall...

 

Will we get a full card?

*  *  *

Full Redline Statement below: