07 July, 2017
Given some of the reportedly fuzzy notions that President Trump has about monetary policy, and the problems he has had in nominating people for other positions, the selection of the next chair of the bank could indeed be very interesting.
"Factory orders did send yields lower, and then obviously we sold off initially on the minutes, and then we came back", said Stanley Sun, interest rate strategist at Nomura Securities International in NY.
The Federal Open Market Committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated. Likewise, the federal funds rate never dipped below 4.75 percent in the latter half of the 1990s during the dot-com boom.
"In summary, the U.S. economy could absorb more rate tightening given that the conditions have not gotten loose enough to compromise the economic activity". But there's little clarity to be drawn from this other than the clear division within the Fed.
The stress test and capital results followed comments to a Congressional panel from the new unofficial regulatory czar, Governor Jerome Powell, which indicated that the Fed is beginning a broad review of the regulatory framework it has instituted since the financial crisis and the passage of Dodd-Frank. It sort of sounds like the Fed had to raise rates rather than wanting to raise rates.
The meeting minutes showed there was considerable discussion over why despite the Fed raising its benchmark rate target four times since December 2015, government bond yields continue to decline.
European markets edge higher, with Germany's DAX and France's CAC both +0.1% and U.K.'s FTSE +0.2%; in Asia, Japan's Nikkei closed +0.3% and China's Shanghai Composite finished +0.8%.
"The Fed is anxious about soft inflation readings - no surprise there, and that will stay their hand on lifting rates for now".
Data last week showed the Commerce Department's core index slowed to 1.4% in May.
Fed officials, including Chairwoman Janet Yellen, have suggested recent weakness in inflation data reflect one-time factors, justifying its continuing efforts to normalize monetary policy despite the signs of shakiness. But they have run up against a significant roadblock because the inflation data stubbornly refuse to cooperate with their forecast.
The Canadian dollar and other commodity-sensitive currencies pared losses following the Fed minutes.
The U.S. was to release the ADP employment report later Thursday along with the ISM non-manufacturing PMI and a report on initial jobless claims. "With regard to the outlook for inflation, some participants emphasized downside risks, particularly in light of the recent low readings on inflation along with measures of inflation compensation and some survey measures of inflation expectations that were still low", the report said. The economy has now reached a solid enough point that the Fed may look to begin unwinding its holdings at some point this year.
