FOMC Mins Indicate Worry About Loose Policy Risks
$DIA, $SPY, $QQQ, $VXX
A divided FOMC did not reach agreement in June on the timing of when to begin shrinking its massive balance sheet, according to minutes of the meeting.
“Several preferred to announce a start to the process within a couple of months,” the minutes of the June 13-14 meeting released on Wednesday in Washington showed. “Some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”
The central bankers in June raised the benchmark lending rate for a 2nd time this year to a range of 1 to 1.25%, while describing monetary policy as “accommodative” in their statement.
Fed officials updated their balance-sheet policy in meeting, laying out a path of gradual reductions with caps.
The Fed wants to start winding down the $4.5-T bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The mins indicated that the committee wants to begin the balance-sheet process later this year.
The FOMC mins showed Fed officials split on other key metrics for monetary policy: “…several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”
Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.
“A few participants also judged that the case for a policy rate increase at this meeting was strengthened by the easing, by some measures, in overall financial conditions,” according to the minutes.
Ms. Yellen said last month that asset valuations look “somewhat rich” using traditional metrics like price-earnings ratios.
Washington DC politics is starting to creep into the outlook of the Fed’s business contacts, the mins showed. “Contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”
Chairwoman Yellen begins her semi-annual testimony to Congress on 12 July before the House Financial Services Committee.
Inflation has below the central bank’s 2% target for more than 5 years.
The mins said “most participants viewed the recent softness” in inflation indicators “as largely reflecting idiosyncratic factors.”
Wednesday, the US major stock market indexes finished at: DJIA -1.10 at 21478.17, NAS Comp +40.80 at 6150.82, S&P 500 +3.53 at 2432.55
Volume: Trade on the NYSE came in at 886.2-M/shares exchanged.
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