Wait Just a Minute…
JPow demands your attention. Yesterday, the often referenced but rarely read minutes from the Federal Open Market Committee’s (FOMC) last meeting dropped, giving us all another way to seem smart in front of our friends.
The minutes from December fit a similar vibe as the one set by Chair Powell immediately following the latest rate hike, where he made continuing hawkishness as obvious as the sun in the sky.
But, then again, this is also the man who “assured” us that ‘22s hikes wouldn’t include any bumps larger than 50bps. Despite solid attempts at Fedspeak, JPow often tells it in a way that real people can actually understand, which often gets him in trouble.
To get specific, let’s check out a few key turns of phrase:
- “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
- “Recent data suggested that real GDP growth in the second half of 2022 was stronger than previously expected, but economic growth was still forecast to slow markedly in 2023 from its second-half pace.”
- “...risks to the inflation outlook were becoming more balanced”
While that’s just a light dusting of this 12-page, single-spaced, double-sided, deliriously boring read, it’s a decently okay summary of the general *vibe*, which is really all your portfolio cares about.
FOMC officials took the chance to double down on the need to maintain a tight policy for longer than may have previously been expected. Rate hikes weren’t all it’ll take, but keeping those rates high is crucial in killing the structural nature of inflation.
Moreover, while participants didn’t seem to anticipate wide-ranging employment cuts, there certainly was a more than healthy appreciation for slowing GDP going into this year. 2022 ended on a high note, with upward revisions to GDP throwing a party for a few days, but JPow and the gang are still doubling down on a period of slower growth in the near future.
And while the Fed Minutes do give us a glance into the psyche of the Central Bank, they’re faaaar from gospel. The Minutes are a prime example of what we call the Fed’s tool of “forward guidance,” which is essentially just the Fed telling us what it’s *thinking* about the future.
More than anything, forward guidance gets most of its benefit by inducing new changes the Fed would like to see in the future. In other words, if the Fed says, “we’re gonna keep rates higher than Wiz Khalifa,” the market will adjust accordingly rather than panicking once the move is actually made.
It’s a way to temper Mr. Market. Does it work? Kinda, sorta, not really…but it’s something!
We’ll see how it goes, but one thing is confirmed: 2023 will be a fun ride.
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