Were the FOMC Minutes Really That Hawkish?

By: Michael Ashton | Fri, Jan 4, 2013
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I suppose I need to say something quickly about the FOMC minutes which were released yesterday, because the markets are seemingly gyrating on a "surprisingly hawkish" reading of them. The dollar is rising strongly, and part of the reason that equities slid in the afternoon yesterday was that it was perceived the Fed wouldn't be endlessly doing QE.

The "surprisingly hawkish" part allegedly comes from this quote:

In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

Various reports today focused entirely on this phrase. Bloomberg, for example, said "Fed board members said they will probably end their $85 billion monthly bond purchases, known as quantitative easing, in 2013, according to minutes of their Dec. 11-12 meeting released yesterday." Of course, they said nothing of the kind. This paragraph followed an extensive discussion about "several persistent headwinds" including the likelihood of tighter fiscal policy, and "[t]he staff viewed...the risks as skewed to the downside." There is far more negative in these minutes than there is positive. This illustrates the danger of taking a single quote out of context.

But what is even more important is this: the Evans Rule is now parameterized. The statement about when officials think that QE will end is simply a statement about when they think the parameters will be realized. But who cares? Private forecasters are no worse than Fed forecasters! Personally, I thought that we'd breach those parameters fairly quickly, and my note on the subject was called "Objects In Mirror May Be Closer Than They Appear." The error here seems to be that people expected QE-infinity really meant that the Fed would be easing forever, and that was incorrect a couple of weeks ago...not yesterday.

In any event, it doesn't matter because the real question isn't how much more water they add to the vat (that is, sterile reserves) but how (and if) they are able to remove the water that is already in the vat - which is trying very hard to get through the valve into M2. Again, I urge readers who took the end of the year off to look at my piece on this topic, "What Will the Fed Do When It's Finally Time To Tighten?" Money supply is accelerating again, +8.25% over the last year. And European M2 in November (numbers just out recently) accelerated to the fastest y/y pace since 2009.

If this makes investors concerned about the sketchy valuations of fixed income and stocks, then good - those markets are frothy and I will welcome prices where long equity investing holds more long-term promise than it currently does. But the reaction to the minutes, in my view, is mostly a case of people failing to understand Fedspeak.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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