Fed Statement Analyzed

There was a panelist on CNBC during its coverage of the Fed decision who put out the idea that the Fed would raise rates 6 times next year. If Trump’s polices do create growth and the Fed reacts to this by raising rates 6 times, Trump will attack the Fed, calling it a political entity aiming to counteract his growth plans. This exact potential for an attack is why the Fed won’t raise rates that fast. Trump also is appointing two Fed governors, so I doubt the Fed would go against his wishes.

The Fed wants to support the economy and the current administration. While the Fed is political in the sense it wants the economy to do well for the administration, it wouldn’t purposely tank the economy as political retribution. I’m the biggest critic of the Fed that you can be, but even I wouldn’t say it is trying to do the wrong thing. The problem is it has tried to do too much to help the economy. It needs to allow the economy to rise and fall in its natural cycle.

The point I am making is there will not be a clash between Trump and the Fed. Trump has been amicable to everyone since he’s been elected. He won’t pick a fight with the Fed over one hike. There would have to be unusually hawkishness for him to make a comment. He can’t possibly get too mad because he’s going to be picking the chairperson in early 2018. Yellen wants to keep her job, so she won’t act against what’s best for the economy. When I say “what’s best for the economy”, I’m referring to propping up the bubbles. It’s what she thinks is best for the economy, not necessarily what would be the best thing. The best possible action would be for her to unwind QE and let the market set rates, but that’s obviously not going to happen.

I will review the changes made to this statement compared to last statement to see how hawkish it was. The first part of the statement has many changes, but the difference in language is so fine, I can’t make any conclusions from it. Is there a difference between moderate and modest? I can’t say for sure. I know the Fed meticulously looks at every word, but the definitions of those words are too close to make a conclusion from the change. The Fed softened its tone on the strength of household spending which would be a dovish point because economic weakness calls for a slower speed of rate hikes. I’ve seen satellite data which shows shopping at brick and mortar stores has declined, but online shopping likely took share points. We will see how strong household spending is this holiday season in January when the numbers come out. The timing of this statement makes it less important as we are right before the holiday shopping period.

The other two changes in the first paragraph show the Fed recognizing inflation has picked up. This is pointing out the obvious, but the fact that the Fed recognizes this is hawkish news. It is remarkable that inflation has increased as the dollar has risen to cycle highs. Some are calling the dollar a bubble. If the dollar did deflate, energy prices would increase even more. The ECB and JCB policies impact Fed policy because the Fed doesn’t want the dollar to be this strong. The Fed is probably hoping to lead the charge towards being more hawkish. If the ECB continues QE into 2018 while the Fed is hiking, the Euro would collapse further versus the dollar which would be a big problem for exports.

In the second paragraph, the Fed, once again, references how oil price increases have led to a pickup in inflation recently. In the third paragraph, the Fed adds the word ‘some’ to describe its support of the strengthening labor market. This is hawkish because it lessens the amount the Fed will focus on the labor market as it shifts to fighting inflation.

The final point I have when looking at this statement is that the Fed was unanimous in its decision to raise rates. Obviously, a unanimous hike is the most hawkish type of hike. The market allowed the Fed to hike. It saw the door opening and walked through it.

The fact that there weren’t many changes to the language of the statement is a point in of itself. The likely reason for this is the Fed has been coming up with new ways to say the same thing all year. Finally, it got the chance to raise rates, so it didn’t have to do a balancing act. There is only a 6% chance of a rate hike in February, so if you miss the contorted language, it will be back in two months!

The Fed claims to be data dependent. It is more data dependent than before because while it is still dependent on the stock market, the stock market is dependent on Trump’s policies. Before Trump, the stock market was dependent on Fed policies, so it was trapped in a feedback loop which wouldn’t let it raise rates. Because the Fed is dependent on Trump’s policies, there’s a small chance of it raising rates in February as Trump will be president for less than two weeks by then. The future meetings are too far in advance to predict because they are reliant on what Trump does in office.

Conclusion

            I’ve seen stories claiming Trump will clash with the Fed. I find that assertion too early to be made. I have stated Trump will need the Fed if he wants to run massive deficits. However, if he needs the Fed it will come to his aid. There won’t be a major dispute on the horizon. The Fed didn’t make many changes to its statement because the change was made in the policy. The next meeting is on February 1st which is much earlier in the month than this meeting was. It makes the meeting a lame duck one because it will be too early in Trump’s presidency to make a move. He likely won’t have made his two Fed governor appointments by then.

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