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FOMC Talks Down Dollar, Fears Growth Slowdown, "Considerable Time" Misunderstood

With the S&P down over 3% from September's FOMC statement, the market needed some 'good' news from the Fed minutes to save the 'wealth' that has been created...

  • *FED OFFICIALS SAW GLOBAL SLOWDOWN AMONG RISKS TO U.S. OUTLOOK (growth)
  • *FOMC SAID SOME DEVELOPMENTS COULD UNDERMINE FINANCIAL STABILITY (bubbles)
  • *FED SAW RISING DOLLAR AS RISK TO EXPORTS, GROWTH, MINUTES SHOW (jawbone USD)

So The Fed fears bubbles, fears growth slowing down, and appears to be talking down the dollar. In other word, dovish minutes confirming the dovish statement was indeed dovish.

Pre-FOMC Minutes: S&P Futs 1936.50, 10Y 2.38%, USDJPY 108.75, Gold $1206

The last FOMC Statement and Minutes day performance...

 

Some of the key sections: on bubble fears:

Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads.

Fears about the dollar:

Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.

On forward guidance, and the need to not change it:

In addition, some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee’s goals. In their view, the costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation. A number of participants also noted that changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions.

On the evolution of forward guidance, which confirms that the Fed once again has no idea what is going on:

Participants also discussed how the forward-guidance language might evolve once the Committee decides that the current formulation no longer appropriately conveys its intentions about the future stance of policy. Most participants indicated a preference for clarifying the dependence of the current forward guidance on economic data and the Committee’s assessment of progress toward its objectives of maximum employment and 2 percent inflation. A clarification along these lines was seen as likely to improve the public’s understanding of the Committee’s reaction function while allowing the Committee to retain flexibility to respond appropriately to changes in the economic outlook. One participant favored using a numerical threshold based on the inflation outlook as a form of forward guidance. A few participants, however, noted the difficulties associated with expressing forward guidance in terms of numerical thresholds for some set of economic variables. Another participant indicated a preference for reducing reliance on explicit forward guidance in the statement and conveying instead guidance regarding the future stance of monetary policy through other mechanisms, including the SEP. It was noted that providing explicit forward guidance regarding the future path of the federal funds rate might become less important once a highly accommodative stance of policy is no longer appropriate and the process of policy normalization is well under way.

The full minutes (link)