Fed Minutes Amendments
The market continues to flirts with new highs, but unable to charge into a break-out rally. The Fed minutes were more proof the Fed will NOT be raising rates, yet many read something completely differently out of it (I am not sure how). Greece continues to be a European headache, while we get weekly jobless claims.
Fed Minutes Amendments
What drove the market is what has been driving the market since 2009 and that is the Fed monetary policy and any news related to it. Yesterday the Fed minutes from the January meeting was released. There is a HUGE difference between Fed minutes (which are sanitized and general) vs. the transcripts of actually what was said. The minutes are released about a month after the meeting; the transcripts are released years later. The latest transcripts are from 2008 and when you read those it makes for far darker and concerning reading than what the minutes of the same time would have us believe.
Before we review the minutes from yesterday and the market reaction, it is important to note that as of 2015 the Fed’s make-up is now completely Keynesian – Dovish. The last two critical Hawks are gone; Plosser and Fisher (Fed Presidents) are no longer in the FOMC voting rotation and have also retired. The new members that have replaced the Hawks are Doves and fully lock-step in line with Yellen and the Keynesian governors.
Courtesy of wikipedia
While the major media is covering the TONE as to whether they will raise rates, there were a couple of votes and items that are being overlooked. If you remember as I mentioned in a previous Market Preview that Dallas Fed Fisher was concerned about some of the structure of the Fed, it seems now with Fisher and Plosser (the two Hawks) gone, the Fed is moving quickly to amend the Authorization for Domestic Open Market Operations in the polar opposite of Fisher criticism. Ironically these votes came at the first meeting after the two Hawks are no longer there. The first unanimous vote was on changing “simplifying language by defining common terms”. This in itself doesn’t seem like a big deal and I would assume most people would get behind creating simpler definitions of common terms. However, when it is followed-up by the second unanimous vote it reflects a reason as to WHY they would like to change some definitions. The FOMC voted unanimously to creating a new term “Selected Bank” simply defined as a selected Federal Reserve Bank that has removed the authorization to use agents for agency mortgage-backed security (“MBS)” transactions and to be able to [freely] define the TYPES of collateral accepted in securities lending operations, with the additional expansion of the Chair’s (Yellen’s) ability to act in “exceptional circumstances.”
Courtesy of infowars
To sum it up – the Fed has removed authorization agents in their transactions of MBS, expanded the definition of what the Fed can use as collateral, and expanded the Chair’s power to act. I am positive that would not have received the unanimous vote if Plosser and Fisher were still on board. Clearly the Fed is expanding the scope and powers of future QE type policy measures. You can draw your own conclusions, but I am wondering what the Fed is planning or at the very least concerned about. You can read the fully amended version here
After they amended the Domestic Operations, they decided to amend the Foreign Currency Operations as well, why not – the Hawks are gone and the Doves rule the roost. They decide to increase the duration limit of their foreign currency portfolio from 18 to 24 months. Fed President Lacker, in the minutes, had voiced his opposition to foreign currency interventionism by the Federal Reserve. In his view such intervention would be ineffective if it did not also signal a shift in domestic monetary policy and if it did it could potentially compromise the Federal Reserve’s monetary policy independence. He is right and this was one of the same issues that Fisher had previously voiced his concern. You can read the fully amended version here
Shift now to the TONE of the Fed, it was very clear that they have NO PLANS to raise rates at their next March meeting. Remember, even Janet Yellen stated as such in her December Press conference, so why people think they would is beyond me. Here are some excerpts from the minutes and you decide if you think they are Hawkish or Dovish:
“In connection with the risks associated with an early start to policy normalization, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee’s objectives of maximum employment and 2 percent inflation.”
“In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound.”
“Indeed, one participant recommended that, in light of the outlook for inflation, the Committee consider ways to use its tools to provide more, not less, accommodation.”
“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”
“More broadly, it was suggested that the Committee should communicate clearly that policy decisions will be data dependent, and that unanticipated economic developments could therefore warrant a path of the federal funds rate different from that currently expected by investors or policymakers.”
The Fed is having a communication problem, they don’t know how to tell us they are keeping rates low indefinitely as they have already set an expectation that we would get back to “normal” when the economy improves.
“Participants discussed the communications challenges associated with signaling, when it becomes appropriate to do so.”
Those that actually read the minutes and amendment changes also noted some significant structural changes in asset purchases. Rather discussing or building an exit plan, the amendments and tone show they are heading deeper down the interventionist rabbit hole.
We should not expect any changes in the Fed monetary policy, only a change in their tone. They are trying to craft a message that sounds something like this. The economy is improving and we would LIKE to start raising rates, however the current inflation rate and the conditions in the foreign markets have put us in a position to remain accommodative.
The market moved decidedly higher off the intra-day lows on the news, it was clear to the market (maybe not all the talking head and pundits) that the Fed was not going to raise rates. The question is how long can cheap money and margin (leverage) inflate asset prices?
Greek Tragedy Act 3
Courtesy of wikipedia
The Greece story continues to loom. The Far-Left Socialist now in control of Greece has previously threatened to exit the Euro (which amounts to a full default) in exchange for more bailout money. The ECB tried to react with a strong-arm by eliminating their ability to use Greek Bonds as collateral. This has forced a stale-mate between Greece and Europe; the Far-Left Socialist (Syriza Party) had offered some concession to its previous hardline stance and pledge to work with Europe for ANOTHER $270 billion dollar bailout. Germany is no fool and has rejected Greece’s application. Really – the Far-Left Party threatens to leave the zone, default on debt, and end austerity and expects Europe to give them 100s of billions? Then when that doesn’t work they now promise to work with them and continue austerity? This Greek situation has been about one thing – buying time. They never had been serious about fiscal responsibility and blame everyone but themselves on all the debt they have created. Now the people have elected Socialism – but Socialism needs money and the only one that has been giving them money is Europe. We are quickly getting to the end-game (read my Greek Time Line Here).
Wal-Mart Price Controls
Courtesy of wikipedia
One of the biggest supporters of minimum wage is the big box retailers. In fact they have even supported RAISING the minimum wage. They have spent money lobbying for it as well. Why would the likes of Wal-Mart SUPPORT minimum wage and even periodical raises to minimum wage? It sounds like the polar opposite of what Wal-Mart and other big box retailers want. The fact is minimum wage is a government price control, which means for Wal-Mart a government COST control. Wal-Mart doesn’t see it as minimum wage; they see it as MAXIMUM wage. The spin from politicians is that they support higher minimum wages and it all sounds great, even if they raise them, but the reality is that minimum wages just set MAXIMUM wages for unskilled labor and that is what the Big Box retailers want.
The other interesting fact is that only 2% of all employed workers are paid at or below minimum wage. Approximately 50% of wage earners are paid hourly, the average wage is approximately $24 an hour and the median wage is $19 and hour. The minimum wage argument makes for great politics, but with only 2% of those employed being paid at or below Fed minimum wage it is near our nation’s all-time low. The other fact is that minimum wage is paid to the unskilled labor force. Most people in your town, city, and neighborhood are NOT paid minimum wage; mechanics, plumbers, sales, accountants, cooks, clerical, programmers, lawyers, government workers, police, etc. It’s fast food and big-box retailers that are the bulk of the minimum wage job. I used to have a minimum wage job in high school – as I am sure most of you did as well. It’s great experience on your ROAD to getting a real job and career – once you have a SKILL.
Enough of my rant on minimum wage – Wal-Mart announced that they raised their wages to $9 per hour. But let’s look at some facts. No ALL Wal-Mart employees are being paid at the Federal Minimum wage level of $7.25 an hour, 30 states have minimum wages over the Federal Minimum. In 7 states Wal-Mart is already paying OVER their $9 an hour minimum wage.
This is certainly good for those unskilled workers in states that pay at the Federal Minimum wage level. However, it is not bad for Wal-Mart either – because they can now get back onboard with lobbying for RAISING minimum wage – be the good guys. Thus set the government COST control for them for the next decade.
Support & Resistance
The Fed minutes pushed the Dow about this level, but the pre-market futures are not showing a follow-through. We are trying to push higher, but we need more confidence and assurances from the Fed that free money is here to stay.
The tech heavy and highly volatile index is on a break-out move higher. It has passed the 4350 level and looking to break 4400 today. This is driven by a few heavy weights in the index, so be careful as it is not representative of the entire sector.
Is this the short-term ceiling that we have a hard time breaking through? The VIX is back down in the 15 range and if we can consolidate and build some momentum, we could get a push higher.
The Russell continues to tell the bigger story of order flow – for now it seems that flow is still coming into the market, but the momentum has slowed some. Watch the close.
Fed getting ready for what?
The Fed is positioning themselves with some significant amendment changes for expanding their program and readying themselves to make faster and bolder moves if need be. The tone of the minutes reads Dovish and data dependent. Fed President Lacker, while a full Keynesian is more centrist. While no Hawk, he is concerned about the dollar and the foreign currency holdings/lending by the Fed.
I can speculate what the Fed sees and fears, as we all can. They are certainly not taking ANY policy action to tighten (raise rates); the amendments are all to prepare for more accommodation not to unwind the balance sheet. The statements and tone from the minutes sounds at best more data dependent – but that is an excuse at best. They are not going to raise rates in March, period!