On Wednesday the Federal Reserve released the minutes from their latest FOMC (Federal Open Market Committee) meeting that took place in July. The minutes provide confirmation that they plan to start unwinding their $4.5 trillion balance sheet at the next FOMC meeting on September 19th and 20th.
A noticeable trend with the Fed this year has been that changes to monetary policy have coincided with meetings that culminate with a televised press conference. This was the case in March when the Fed hiked rates, and also in June when they did the same again. Meetings in both September and December will also conclude with press conferences. September will see the announcement of the balance sheet reduction programme, whereas December will likely see a final rise in interest rates for 2017.
The Fed will not raise rates in September, but crucially they now have a two pronged approach to ‘normalising‘ monetary policy. When they are not raising rates, they will be reducing their balance sheet. There will be a constant emphasis on ‘normalisation‘ with rate hikes occurring in between the balance sheet sell off.
The September meeting comes just days before the debt ceiling comes into focus again. The last time this gained attention was back in March when the Fed raised rates. As I have mentioned before, geopolitical conditions around the time of the Fed’s next meeting and debt ceiling negotiations will be of interest – especially if they act as a distraction from the economy.
As the Fed push on with ‘normalising‘ monetary policy – in spite of a steady stream of negative data and muted inflation levels – U.S. household debt now stands at a record $12.8 trillion. A fact that is gaining next to no attention as the rising cost of servicing debt pushes both businesses and individuals into financial hardship.
- Investors were spooked by the central bank’s account on Wednesday of its last policy meeting. The message: The time is right to tighten monetary policy. That’s because financial conditions — higher stock prices, lower bond yields, easy credit terms — are too lax
- Policymakers warned of “elevated vulnerabilities” to financial stability from high asset price, saying directly that monetary policy would run tighter “than otherwise was warranted” to address this risk.
- The Fed minutes notes that “many” participants believe the balance sheet reduction would “contribute only modestly to the reduction in policy accommodation.” In other words, they don’t see this move as a substitute for rate hikes.
- All this raises the stakes massively for the September jobs report just ahead of the Labor Day weekend. Another read on inflation will come on September 14 when the update on the Consumer Price Index will be released. The Fed will issue its next pronouncement on the economy and interest rates on September 20.
- Minneapolis Fed President Neel Kashkari said on Thursday that the Federal Reserve will take into consideration the state of government efforts to raise the federal debt limit in deciding when to start winding down the central bank’s large bond portfolio.
- “I think you would expect to see us also look at the debt ceiling negotiations that are happening in Congress,” Kashkari said at a Rotary Club event in Edina, Minnesota. “I think we want to keep our eyes open to that process.”
- JPMorgan Asset Management says the wider market is mispricing the likelihood that the U.S. Federal Reserve will raise rates again in December.
- Marika Dysenchuk, fixed income client portfolio manager at JPMorgan Asset Management, said Thursday the market is underestimating the likelihood.
- “While we will need to see inflation tick up for the Fed to hike, we certainly think they are in play for December. We think it is just a matter of time and over the medium and long term we expect to see inflation to kick in. So again we expect to see the Fed hike rates in December with probably another couple of hikes next year in order to get to that zero percent real yield and then they might pause and take it from there.”
- The Federal Reserve engaged in an intense debate in July about the path of U.S. inflation after a spate of surprisingly low readings, raising questions about whether the central bank will raise interest rates again this year.
- The Fed’s policy-setting group appeared more unified on a plan to announce in September a long-awaited drawdown of the bank’s huge $4.5 trillion asset portfolio,
- Although a few members wanted to announce a starting date in July, “most preferred to defer that decision until a coming meeting” to allow Fed officials to better assess the health of the economy.
- The Fed is probably on track to go public at its next meeting Sept. 19-20 given a rebound in the U.S. economy after a slow start in 2017.
- According to the just released latest quarterly household debt and credit report by the NY Fed, Americans’ debt rose to a new record high in the second quarter on the back of an increase in every form of debt: from mortgage, to auto, student and credit card debt. Aggregate household debt increased for the 12th consecutive quarter, and are now $164 billion higher than the previous peak of $12.68 trillion set in Q3, 2008. As of June 30, 2017, total household indebtedness was $12.84 trillion, or 69% of US GDP.
- And while much of the report was in line with recent trends, and the overall debt that was delinquent, at 4.8%, was on par with the previous quarters, the NY Fed did issue a red flag warning over the transitions of credit card balances into delinquency, which the New York Fed said “ticked up notably.”
The Federal Reserve’s second in command warned the Trump administration’s rollback of bank regulations may be “very dangerous” and another senior Fed official suggested the White House’s goal of 3% annual economic growth is unrealistic.
“It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude,” Fischer told the Financial Times. “And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely shortsighted.”
- U.S. homebuilding unexpectedly fell in July as the construction of multi-family houses tumbled to a 10-month low, but strong job growth is expected to continue to support the housing market recovery.
- Housing starts declined 4.8 percent to a seasonally adjusted annual rate of 1.16 million units, hurt also by a drop in groundbreaking on single-family projects, the Commerce Department said on Wednesday.
- June’s sales pace was revised down to 1.21 million units from the previously reported 1.22 million units.
- According to the latest update from Black Box Intelligence’s TDn2K research, in July both same-store sales and foot traffic declined once again, and this time the slide was more pronounced, tumbling by -2.8% and -4.7% compared to declines of “only” -1% and -3% in June, respectively, in the process extending the stretch of year-over-year declines for the US restaurant industry to 17 consecutive months – the longest stretch since the financial crisis.
- It’s understandable that Trump is playing nice with Yellen while she’s helping keep things seemingly peachy keen in the markets. But the consequences of the Fed’s balance sheet “normalization” program may start to be fully felt next year. He shouldn’t underestimate the risks of the bubble he identified in 2016 bursting in time for the elections in 2018.
- This year’s mid-terms will be of particular concern to Fed officials. Republicans have a shot at expanding their majority in the Senate and finally being able to pass conservative legislation..