Loonie Tumbles After BOC Keeps Rates On Hold, Signals "Continued Caution", "Considerable Uncertainty"

After two rate hikes earlier in the year, one of which caught traders by surprise, moments ago the Bank of Canada announced that it had kept its rate on hold at 1.00% as expected.

Stateing that "the global economy is evolving largely as expected in the Bank’s October Monetary Policy Report (MPR)" the central bank noted that while in the United States, "growth in the third quarter was stronger than forecast but is still expected to moderate in the months ahead." It added that "growth has firmed in other advanced economies. Meanwhile, oil prices have moved higher and financial conditions have eased."

Looking back the data was "in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017." Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However,  the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected.

The BOC also noted that it "inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices."

Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack. Revisions to past quarterly national accounts have resulted in a higher level of GDP. However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output. Meanwhile, despite rising employment and participation rates, other indicators point to ongoing­ – albeit diminishing – slack in the labour market

However, while recent BOC announcement have sent the loonie surging, today the Canadian currency tumbled after it reiterated that it "while higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation."

And another caution: "the global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies."

In immediate kneejerk response, the loonie is lower some 100 pips against the dollar, with the USDCAD rising to 1.2745 at publication time.

What Few Expect: Inflation Will Surge, Destabilizing The Status Quo

Authored by Charles Hugh Smith via OfTwoMinds blog,

Few seem to ponder what global shortages in key commodities might do to prices.

If there is any economic truism that is accepted by virtually everyone, it"s that inflation is low and will stay low into the foreseeable future. The reasons are numerous: technology is deflationary, globalization is deflationary, central banks will keep interest rates near-zero essentially forever, and so on.

Just for laughs, let"s look at healthcare, almost 20% of America"s entire economy, as an example of low inflation forever. If being up over 200% in the 21st century is low inflation, I"d hate to see high inflation.

Here"s the official Consumer Price Index (CPI), which as many have noted, severely distorts real-world inflation by claiming big-ticket items such as college tuition and healthcare are mere slivers in household budgets.

Note the remarkably stable trend line in CPI over the past 40 years. This certainly doesn"t shout "inflation is near-zero and will stay low indefinitely."

Here"s the PCE, Personal Consumption Expenditures, the Federal Reserve"s favored measure of core inflation. Let"s put it this way: either the PCE is real and the CPI is false, or vice versa; they can"t both be accurate measures of real-world inflation.

Here"s a look at the annual rate of inflation. The go-go years prior to the Global Financial Meltdown of 2008-09 and the years of "recovery" 2010 to 2014 look very similar: some modest volatility between 1.7% and 2.5% annually.

But something changed in 2015-2017. The wheels fell off and then inflation turned up. Maybe it was nothing, maybe not. Let"s turn to a chart of asset inflation for a different perspective.

Courtesy of Goldman Sachs, here is a chart comparing asset inflation with real-world inflation. Note how assets have soared while real-economy measures have barely edged higher--commodities actually fell in price.

Now let"s look at where the gains of the "recovery" were concentrated: in the hands of the few in the top .5%. This chart depicts the unprecedented concentration of income gains in the very apex of the wealth-power pyramid. Needless to say, very little trickled down to the bottom 90%, and even the top 9.5% received mere crumbs.

So what do these charts tell us about future inflation prospects? To the conventional punditry, they suggest more of the same: higher asset valuations, low real-world inflation and near-zero interest rates (courtesy of central bank purchases of bonds and other financial assets).

I beg to differ. To me, these charts suggest real-world inflation is about to take off in the next 5 years, surprising everyone who expected more of the same. My reasoning is simple:

The leadership of the Status Quo has a simple choice: continue with more of the same, enriching the top .5% at the expense of everyone else, and face a political firestorm of upheaval, instability and insurrection, or start funneling the trillions of dollars, yen, yuan and euros that have been channeled into the hands of the few into the hands of the many.

The policy of funneling fresh cash into the hands of households has a number of variations: negative tax rates (lower income households get a hefty tax rebate annually), Universal Basic Income (UBI--every adult gets a monthly cash stipend), QE for the people (the central bank buys special government bonds that eliminate all student loan debt), and so on.

Where virtually all central bank monetary stimulus over the past 8 years went into assets, QE for the people would go right into household bank accounts where most of it will be spent in the real economy.

The incomes of the bottom 90% have gone nowhere for 8 long years. No wonder real world inflation has been capped outside of housing, healthcare and higher education. (Never mind these are the dominant expenses for the majority of households.)

So what happens when fresh trillions start flowing into the real world economy instead of into assets? If history is any guide, inflation picks up. Toss in some global shortages in key commodities and the fuel for inflation will be ready to ignite.

One part of the inflation will stay low indefinitely story is there"s an abundance of everything: grain, oil, natural gas, copper, bat guano--you name it, the world is awash in the stuff.

Few seem to ponder the possibility that this surplus of everything might be temporary, a brief run of extraordinary luck rather than a permanent abundance. Few seem to ponder what global shortages in key commodities might do to prices.

Whether you call soaring prices inflation or not, the result is the same: the purchasing power of currency declines. Every unit of currency buys less of whatever is no longer in surplus.

The funny thing about inflation is that it"s not a problem that can be solved by creating trillions more dollars, yuan, yen and euros out of thin air. Issuing mountains of new currency actually increases inflation.

Oops. Our only "fix" is to issue trillions more in new currency and credit. If that doesn"t fix the problem, the toolbox is empty.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

Watch Live: Hawkish Yellen Says Fed May Have Misjudged Inflation, Labor Market

Update: In her prepared remarks, Yellen crucially said,

“A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”

As Bloomberg explains, she is stating a bit more clearly than before that the FOMC doesn’t have a handle on why inflation is low and acknowledging that it may last longer than they predict.

*  *  *

As we detailed earlier, on the heels of Bostic ("we didn"t blow any bubbles") Brainard ("some barriers to growth are structural") this morning and Kashkari ("no inflation"), Evans ("need more data"), and Dudley ("inflation"s coming soon") yesterday; it is Fed Chair Janet Yellen"s turn to speak this afternoon on "Inflation, Uncertainty and Monetary Policy" as the dollar extends its post-FOMC gains (to 1-month highs).

Since The FOMC, Fed Speakers have been active...

Raphael Bostic, Atlanta Fed president: "I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble."

Lael Brainard, Fed governor: Benefits of a lengthy U.S. recovery “can only go so far” and some barriers appear to be structural, sees "widening gulf" between large, small cities.

Neel Kashkari, president Minneapolis, FOMC voter in 2017: “I don’t see inflation taking off so I see no need to tap the brakes.”

Charles Evans, president Chicago Fed, voting member: “I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation.”

William Dudley, president New York Fed, permanent voter (and most notably considered to be closely aligned with Yellen"s way of thinking): “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.”

As a reminder, the Fed Chair said that "we don"t fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery," but, while Yellen speaking would normally be must-watch, with only a few days having passed since her post-statement press conference, we wonder just how much flip-flopping is possible. At that appearance, the Fed chief also downplayed the significance of the weak core inflation data as the central bank set the start date for the reduction of its balance sheet and signaled that an additional rate hike this year remained appropriate.

Additionally, though we doubt she will comment on it, Republican Senator Richard Shelby said he doesn’t think President Donald Trump will nominate Yellen for a second term at the helm of the U.S. central bank. Shelby said Tuesday in an interview with Bloomberg Television’s Vonnie Quinnthat he had spoken with the president about the Fed.

“I believe he will appoint somebody else to take her place,” the No. 2 Republican on the Senate Banking Committee said. “But ultimately, that is up to the president.”

Live Feed (from The National Association of Business Economics)

click image for link to Bloomberg"s Live Coverage

Headlines include (via Reuters)

• YELLEN SEES "CONSIDERABLE" ODDS THAT INFLATION WON"T STABILIZE AT 2-PCT OVER NEXT FEW YEARS


• FED"S YELLEN SAYS UNCERTAINTIES STRENGTHEN CASE FOR GRADUAL RATE HIKES


• YELLEN SAYS GRADUAL APPROACH TO RATE HIKES PARTICULARLY APPROPRIATE IN LIGHT OF SUBDUED INFLATION, LOW NEUTRAL RATE


• YELLEN SAYS THERE IS A RISK INFLATION EXPECTATIONS ARE NOT AS WELL-ANCHORED AS THEY APPEAR


• YELLEN SAYS DATA SUGGESTS LABOR MARKET IS HEALTHY, WITHOUT SUBSTANTIAL SLACK AND NOT OVERHEATED


• YELLEN SAYS EVIDENCE ON LABOR MARKET NOT DEFINITIVE, MUST BE "OPEN-MINDED"


• YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT


• YELLEN SAYS FED CAN STILL ACHIEVE 2-PCT INFLATION GOAL EVEN IF IT IS UNDERESTIMATING SLACK OR OVERESTIMATING INFLATION EXPECTATIONS


• FED"S YELLEN SAYS LOW INFLATION LIKELY DUE TO TRANSITORY FACTORS, SEES MANY UNCERTAINTIES


• YELLEN SAYS DOWNWARD PRESSURE ON INFLATION COULD PROVE UNEXPECTEDLY PERSISTENT


• YELLEN SAYS FED SHOULD BE `WARY OF MOVING TOO GRADUALLY"


• YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT

Via Bloomberg:

Fed Chair Janet Yellen said FOMC may have misjudged fundamental forces driving inflation and strength of labor market, and policy makers “stand ready to modify our views based on what we learn.”

• “We will need to stay alert” and adjust monetary policy as information comes in, Yellen said in text of speech Tuesday in Cleveland during annual meeting of National Association for Business Economics 


• “My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”

Downward pressures on inflation “could prove to be unexpectedly persistent”

• Economic outlook is subject to “considerable uncertainty”

FOMC’s understanding of the forces driving inflation is “imperfect,” policy makers recognize “something more persistent” may be responsible for current undershooting of long-run objective

• While inflation will most likely stabilize around 2% over the next few years, “odds that it could turn out to be noticeably different are considerable”


• There’s also risk that inflation expectations “may not be as well anchored as they appear and perhaps are not consistent with our 2 percent goal”

Stabilizing inflation at around 2% “could prove to be more difficult than expected” 

Key assumptions underlying baseline outlook “could be wrong” in ways that imply inflation will remain low for longer than currently projected; for example, labor market conditions may not be as tight as they appear

Under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”

Significant uncertainties strengthen the case for gradual pace of tightening; however, Fed must also be wary of moving too gradually; “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”

Actual value of long-run sustainable unemployment rate “could well be noticeably lower” than FOMC currently projects; can’t rule out possibility that some slack still remains in labor market

• Unemployment rate is probably “correct” in signaling that labor-market conditions have returned to pre-crisis levels; however, that doesn’t necessarily mean that economy is now at full employment


• Data suggest a generally healthy labor market, although can’t make “any definitive assessment”; policy makers “must remain open minded on this question” and its implications for reaching inflation goal 

Goldman Cuts Rate Hike Odds After 5th Consecutive Inflation Miss

The Fed is becoming increasingly trapped: despite the FOMC"s "best intentions" to telegraph that the economy is improving with the unemployment rate at a paltry 4.3% - because otherwise it clearly wouldn"t be hiking, right - CPI has now missed consensus estimates for 5 consecutive months, and what worse, the biggest historical driver of inflation in recent years, shelter and rent inflation, appears to have peaked and is now declining. Worse, wage inflation is nowhere to be found, much as one would expect from a bartender and waiter-led "recovery."

Of course, never one to miss a scapegoat, earlier today Dallas Fed president Robert Kaplan blamed the lack of inflation on technology, saying at an event in Texas that technological disruption is "a new and powerful structural factor that is influencing inflation" and finally noticing that "technology is increasingly replacing people in the jobs market" while "allowing consumers to change shopping habits, and is limiting the pricing power of businesses. That - in addition to global factors - has an impact on inflation."

Predictably there was no discussion of how it is the Fed"s trillions in excess liquidity that has allowed VCs to invest tens if not hundreds of billions in money-losing ventures, which have made this tech-driven deflation possible.

As an aside, while the BLS-reproted CPI continues to deteriorate, the Atlanta Fed reported that its own sticky-price consumer price index —a weighted basket of items that change price relatively slowly—rose 2.6% annualized in July, following a 2.2% increase in June. The 12-month percent change in the index remained at 2.1%. Then again, the Fed is known to avoid any indicator that defies the prevailing groupthink, which now seems to be that inflation is lower than the Fed would like it to be.

So while the Fed ponders how to escape this trap it has created for itself, in which zombie companies refuse to die and where cash burning tech companies push inflation ever lower, at least until rates rise enough to crush the VC party once and for all, here is Goldman which moments ago once again cut its forecast for a rate hike possibility in 2017.

The consumer price index rose 0.11% in July in both the headline and the core, missing expectations for the fifth consecutive month. The primary sources of weakness were lodging away from home and new vehicle prices, and we suspect the former will rebound in coming months. Nonetheless, we now estimate that the core PCE price index rose just 0.08% month-over-month in July, or 1.40% from a year earlier, down from +1.5% in June. Accordingly, we now place the subjective odds of a third hike this year at 55% (vs. 60% previously).

The details:

1. The consumer price index (CPI) rose 0.11% month-over-month in both the headline and the core (excluding food and energy), below expectations for the fifth consecutive month. Food prices rebounded (+0.2%) but energy prices edged down (-0.1%), providing offsetting impacts for the headline CPI, where the year-over-year rate moved up a tenth to +1.7% (vs. consensus of +1.8%). Relative to our expectations, the sources of weakness in core inflation this month were lodging away from home (-4.2% mom) and new car (-0.5%) prices, which together reduced month-over-month core inflation by -0.07pp. The lodging decline was the largest on record (back to the 1960s) and appears at odds with continued firmness in the PPI and industry measures. Despite the overall weakness, month-over-month inflation was generally firm in the large and persistent housing and medical care categories, with increases in medical services (+0.3%), medical commodities (+1.0%), and owners’ equivalent rent (+0.27% vs. +0.28% in June) prices, despite the sequential deceleration in rent of primary residence (+0.24% from +0.35% in June).


2. Based on details in the PPI and CPI reports, we estimate that the core PCE price index rose just 0.08% month-over-month in July, or 1.398% from a year earlier (vs. +1.505% in June). Additionally, we expect that the headline PCE price index rose 0.08% in July, or +1.392% from a year earlier.


3. Despite encouraging component detail, the overall CPI report was clearly disappointing. We lowered our Fed probabilities accordingly, with subjective odds for a third hike this year at 55% (vs. 60% previously). In terms of timing, we place the odds of the next hike at less than 5% for September (vs. 5% previously), less than 5% for November (vs. 5% previously), and 55% cumulatively by December (vs. 60% previously).

At the current rate of economic disappointments, that 55% will hit zero in about 4-6 weeks.

JPM Cuts 10Y Yield Forecasts "Significantly Lower" Due To Weaker Inflation Outlook

Just one day after Goldman reluctantly cut its 2017 year end forecast on the 10Y yield last Friday from 3.00% to 2.75%, "reflecting some added uncertainty on the US macro outlook" while conceded that "bond bears", i.e., those clients who have listened to it, "have had a difficult 2017" it was JPMorgan"s turn, and over the weekend JPM announced it was adjusting its US rate forecast "significantly lower", slashing its year end 10Y yield target to 2.75% from 3%, reflecting “a weaker outlook on core inflation and reduced expectations around tax reform and infrastructure spending.”

In the note by JPM"s Jay Barry, the bank also trimmed most other tenor forecasts by 15bp-35bp lower, saying that the inflation outlook “has changed markedly” over past month based on weakness in core CPI in March and April. JPM also said that  as for fiscal stimulus, odds are rising that it “gets pushed into FY18.”

And also just like Goldman, JPM tried to hedge adding that "even so, UST yields should rise in coming weeks,” because markets "continue to underprice the risk of further Fed tightening,” and yields “have consistently risen” ahead of FOMC meetings that include SEP and press conference; also, Treasuries “appear locally rich to other DM government bond markets.”

Finally, JPM maintains its recommendation to hold shorts in the 3-year sector and urges 10s30s flatteners, as the curve is ~3bp too steep adjusted for market’s medium-term Fed and inflation expectations.

Meanwhile, the fed funds market continues to be blissfully disconnected from the recent sharp slowdown in US economic data surprises, which as noted previously has posted one of the biggest drops on record, and if the disappointment persists, it is not impossible that the Fed will punts its June rate hike which the market now assumes is virtually assured.

FOMC Preview: Here Are The Possible Surprises In Today's Statement

Today"s FOMC announcement at 2:00pm is expected to be mostly a non-event, and the only incremental information will be what is contained in the updated statement, which comes one month ahead of the Fed"s next expected rate hike in June. There will be no press conference and no update to the summary of economic projections. The statement is expected to incorporate modest changes to reflect recent (mixed) data but see the risks around the meeting are low.

Here is what Wall Street consensus looks like ahead of 2pm:

• The market expect no rate hike at the May meeting; Fed Fund futures are currently pricing in a 65% probability of a June rate hike.


• There is a risk of a small hawkish surprise if the committee indicates they are "looking through" Q1 weakness in growth and inflation.


• A less likely dovish surprise could come from the FOMC emphasizing the decline in inflation.


• It is likely too soon for the committee to update language related to reinvesting balance sheet securities.


• Subsequent Fed speeches by Yellen, Fischer, Williams and Rosengren on Friday will likely provide additional color

Continuing the trend from recent weeks, most Wall Street firms expect the Fed to hike twice more this year despite the recent slowdown in US economic indicators and the near record collapse in the Citi eco surprise index, in June and September and announce balance sheet reduction in December.

With that in mind, below are some observations from Citigroup on the few surprises in the "wording" contained in today"s statement:

FOMC “looking through” weak Q1 may read slightly hawkish

The statement will need to update language regarding inflation, consumption, and job growth – all of which have slowed since the March meeting. The relative hawkishness depends on the extent to which Fed officials attribute the softness to transitory factors.

Consumer spending – Spending slowed significantly in January and February. The consensus view (reflected in March FOMC minutes) is that much of the weakness is transitory owing to (1) less utilities usage due to warm weather and (2) delayed tax refunds.

March: "Household spending has continued to rise moderately"

• Dovish: Household spending moderated.


• Neutral: Household spending moderated but consumer sentiment remains high and real income growth has been robust.


• Hawkish: Household spending moderated largely due to transitory factors

* * *

Inflation – A surprise decline in core prices in March led core PCE to print 1.6% year-on-year undoing most of the progress since 2016. Some update of the inflation language is in order.

March: "Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent."

• Dovish: Inflation is running below the committee’s longer term objective


• Neutral: Inflation has edged lower


• Hawkish: Inflation edged lower in part due to large declines in certain categories.

* * *

Labor market – Going into the March FOMC meeting the economy had added over 200k jobs in each of the previous two months. The last job print of 98K was widely attributed to payback from previously warm weather.

March: "Job gains remained solid and the unemployment rate was little changed in recent months."

• Neutral: Job gains slowed but the unemployment rate fell further.


• Hawkish: Job gains were solid over the last quarter and the unemployment rate fell further.

* * *

Balance Sheet – Discussion of the timing and details of tapering of reinvestments will likely continue at the May meeting. Assuming tapering is announced in December, the committee may wait until at least June and more likely September before adjusting language in the statement regarding the balance sheet. The minutes to be released on May 24 will likely be more informative on this point.

* * *

And here is Goldman"s full list of exepctations for today"s statement:

1. Constructive comments on full-year growth. Despite the 0.7% increase reported in this morning’s Q1 GDP report, we expect the FOMC statement will continue to sound constructive on growth trends, repeating that “economic activity has been expanding at a moderate pace”, or simply saying that activity “continued to expand.” Underlying growth in the first quarter appears firmer than headline GDP would suggest, and Fed officials including Vice Chair Fischer have argued that growth is likely to be stronger during the remainder of the year. Exhibit 1 summarizes this mixed but generally positive message from growth indicators, which featured some sequential slowing in payrolls growth and our Current Activity Indicator (CAI) but also a drop in the U3 and U6 unemployment rates as well as positive data surprises on net. Relatedly, we expect an adjustment to the statement’s labor market characterization that acknowledges the pronounced drop in the unemployment rate, yet also softens the language around “solid” recent job gains (reflecting the slowdown in March headline payroll growth). We also expect the committee to downgrade its assessment of household spending (from “rise moderately” to “rise modestly”) and for the committee to remove the word “somewhat” in its characterization of firming business investment (i.e. “business investment appears to have firmed.”)

2. Few changes to description of inflation-related data. The previous statement distinguished between headline- and core inflation, a distinction we expect the committee will retain. However, given the pronounced softness in the March core inflation report, the previous statement’s “little changed” characterization of core inflation would seem out of place. Indeed, this morning"s GDP report was consistent with core PCE inflation at 1.6% in March (yoy), down from 1.7% in February. Accordingly, we expect a brief acknowledgement of this softness (i.e. “core inflation slowed somewhat in March”). However, we expect the statement will retain the “continued to run somewhat below 2 percent” wording. Also, the mid-April drop in market-based measures of inflation expectations largely reversed in the final week of the month, with 5Y/5Y breakeven inflation now back at the March levels (2.1%). As a result, we expect no changes to the inflation expectations wording.

3. And unchanged inflation outlook. Despite the March setback, the drop in the March unemployment rate coupled with the committee’s apparent growth optimism suggest little need to modify the inflation outlook. We currently forecast core PCE inflation to reach 2.0% in early 2018, which seems broadly consistent with the March statement’s expectation that “inflation will stabilize around 2 percent over the medium term.” Accordingly, we expect no changes to the inflation outlook paragraph.

4. Unchanged balance of risks and “accommodative” policy description. At its June 2016 meeting, after concerns about the spillovers from Brexit had faded, the FOMC said in its statement: “Near-term risks to the economic outlook have diminished.” The committee upgraded this language again at the September meeting, saying: “Near-term risks to the economic outlook appear roughly balanced.” The qualifiers “near-term” and “roughly” suggest Fed officials are less than fully confident about the outlook. However, we do not expect any changes to this section of the statement, as improving international growth trends are likely weighed against continued geopolitical risks and today’s softer 1Q GDP data. A meaningful upgrade to the balance of risks should be taken as a hawkish signal for the near-term policy outlook, in our view. In terms of the assessment of the stance of current policy, committee members appear to use “accommodative” interchangeably with “modestly” or “moderately accommodative,” and we see little reason to qualify the “accommodative” characterization in next week’s statement – particularly because doing so would likely be interpreted as a dovish shift. 

5. Subtle reference to eventual balance sheet adjustment. We expect a minor change to the balance sheet paragraph, with some sort of allusion to possible eventual reductions. Given the extent of the discussion in the minutes to the March FOMC meeting – as well as several comments by Fed officials over the last month about the Fed’s plans for ending reinvestment – it would seem odd for the statement to omit any reference to the topic. At the same time, committee members will likely want to avoid signaling an imminent policy change. If the committee does edit this section, we expect the wording to be fairly vague and noncommittal. One possibility is that the committee adopts the “gradual and predictable” language from the March minutes as a description of its overarching balance sheet policy. 

6. No explicit mention of fiscal policy. Notwithstanding the Wednesday tax announcement, the committee has gained little incremental clarity on the legislative outlook since the March meeting. Furthermore, the FOMC does not explicitly include the issue in the list of factors it will use to assess appropriate monetary policy (even though fiscal stimulus may be the single most important source of uncertainty for the economic outlook this year and next year.) The committee has mentioned fiscal policy in past statements, but only after-the-fact in recent years. For example, statements in 2009 referred to “fiscal and monetary stimulus”, while those in 2013 said that “fiscal policy is restraining economic growth”. A similar approach seems likely this time around, with fiscal policy only discussed in the statement after legislation begins to affect the economy. 

7. No dissents. Minneapolis Fed President Neel Kashkari dissented against the March hike, but dovish dissents seem very unlikely given our expectation that rates will be left unchanged. We also do not expect any hawkish dissents, in part because a pause at this meeting would still be consistent with as many as four hikes over the course of 2017 that could be achieved in the three remaining press conference meetings.

It's 1937 All Over Again: Weak GDP, Soaring Inflation, and the Fed Hiking

The US economy continues to implode as inflation ignites.

GDP Now has collapsed from 3.4% in early February to 1.3% today. It will be revised even lower based on the awful deficit numbers (the US trade deficit hit a five year high in January).

Meanwhile, inflation is soaring.

The Fed tracks FOUR inflation metrics. They are Core CPI, Core PCE, Trimmed Mean CPI and Cleveland Median CPI.

Roughly all four are now at or above the Fed’s so-called “target” of 2%.

·      Core CPI is growing at an annualized rate of 2.1%.

·      Cleveland Median CPI is growing at an annualized rate of 2.2%.

·      Trimmed Mean CPI is growing at an annualized rate of 2.1%

·      Only Core PCE is just below the Fed’s target rate at 1.9%.

Weak economic growth and soaring inflation… there’s a word for that… it’s called STAG-flation.

The Fed is going to repeat its 1937 mistake of hiking rates into a weak economy. Now, like then. CPI is soaring while GDP growth flatlined.

Inflation soaring.

Year	% Change in Avg CPI Year over Year
1929	0.00%
1930	-2.30%
1931	-9.00%
1932	-9.90%
1933	-5.10%
1934	3.10%
1935	2.20%
1936	1.50%
1937	3.60%
1938	-2.10%

GDP flatlining.

The Fed aggressively hiked into this mess. The outcome?

The US plunged into recession and stocks nearly halved.

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