In a Fed Meeting Minute, Everything Can Change

In a Fed Meeting Minute, Everything Can Change

In the blink of an eye. In a heartbeat. In a New York minute. Life can and does change in these thinnest slices of time. And yet for Don Henley’s anthem to the swiftness of change, and just how quickly those sharing our lives’ most precious moments can be lost, he ran against the norm for 6.22 minutes of endless pain and sorrow.

New York Minute, recorded in 1989 for Henley’s best-selling solo album, The End of Innocence, proved to not only have staying power, but to also be “the album’s most unique and interesting track.” The iconic title already in mind, he turned to songwriter Danny Kortchman for help with the lyrics. His stated aim: capture the atmosphere of a late 1980’s New York City, a gritty scene of come-hither lights, drugs and overt excess all fueled and well-greased by the golden glitter of greed.

That the song opens with an obviously lost, maybe even suicidal, Wall Street refugee is telling. Tom Wolfe’s Bonfire of the Vanities, his bestselling novel, was sweeping the globe on its way to becoming what the Guardian dubbed, “the quintessential novel of the 80s.” Chronicling the downfall of a Wall Street “Master of the Universe,” Wolfe’s main character painfully parallels Henley’s lost soul.

Then, even in real life, Masters fell. Nearly 30 years on, in the endless wake of the financial crisis, it’s deeply dissatisfying that the country’s gone to emergency, but nobody’s going to jail. Such is the reality of a Wall Street that’s become too complex to regulate and police.

While cause and effect elude, complexity does help explain why central banking policy struggles to keep up. With the toolbox of nominal interest rates barren, Fed officials have been forced to deploy nuance in its stead. Veiled threats delivered via FedSpeak have nearly exhausted their utility given their schizophrenic nature. The same cannot be said of the Federal Open Market Committee meeting minutes, which, in the markets’ estimation, have risen to command equal stature to that of the FOMC statement.

Perhaps less appreciated is that years ago in the heat of the financial crisis, Janet Yellen herself had already written the lyrics of the tune to which markets today dance. As she said at the December 16, 2008 FOMC meeting, one in the same at which interest rates were banished to the zero bound, “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

Score one for success on that count. Now, when they’re scheduled for release, media outlets place the minutes at the top of the week’s roster. This is from Reuters in its look ahead to this week’s trading: “Minutes to the Fed’s July policy meeting due on Wednesday may come under more scrutiny than normal given the central bank really only has one opportunity left, at its meeting next month, to raise rates before the November presidential election.”

As for the aforementioned FedSpeak on the week’s docket, which includes in alphabetical order, Bullard, Dudley, Kaplan, Lockhart and Williams, Reuters nails it: “Fed officials have given differing and often conflicting signals throughout much of this year on when the next move will come, leaving few with any clear sense of how much of a risk there is of a September rate rise.”

In the markets’ eyes, the minutes clarify, the words confuse. Why is that?

Look no further than Yellen’s original vision – that the minutes provide ‘quantitative information.’ Given the choice, markets will trade off quantitative over qualitative (FedSpeak words) any day.

But wait! They’re both word constructs. Right? Well yes, but one of the inputs is controlled, the other a complete unknown given what some maverick Fed district president might short-circuit and say in a speech. High frequency traders can build algorithms around instances of key words in the minutes. But it’s anyone’s guess when it comes to FedSpeak, no hot money profit potential, no sex appeal.

The Associated Press’ Martin Crutsinger recently had the gumption to call out the Chair. The venue was the press conference that followed this June’s FOMC meeting and refers back to this past April’s minutes’ release. His question was too priceless to paraphrase, you’ll soon concur:

“When the April minutes were released, they caught markets by surprise. In there, they showed – they seemed to show that there was an active discussion of a possible June rate increase, something we hadn’t gotten from the policy statement that was issued right after the meeting. Was that a conscious decision to hold back and tell us in – when the minutes came out, about the June discussion? And if so, could you tell us what surprises we could see in the June minutes?”

Do the words, ‘you could have heard a pin drop,’ come to mind?

Yellen’s answers has to have gone down as one of the most uncomfortable of all time. To watch, that is. She starts out by contradicting her position on the power of the minutes to shape market perceptions with the following:

“So the minutes are always – have to be an accurate discussion of what happened at the meeting. So they’re not changed after the fact in order to correct possible misconceptions. There was a good deal of discussion at that meeting of the possibility of moving in June, and that appeared in the minutes.”

And then began the tap dance to top all tap dances. Apologies in advance for sharing the pain, but you simply have to close your eyes as if you were in the room, or watching on TV, to get from beginning to end, to feel the embarrassing burn.

“I suppose in the April statement, we gave no obvious hint or kind of calendar-based signal that June was a possibility. But I think if you look at the statement, we pointed to slower growth but pointed out that the fundamentals—there was no obvious fundamental reason for growth to have slowed. And we pointed to fundamentals underlying household spending decisions that remained on solid ground, suggesting that maybe this was something transitory that would disappear. We noted that labor market conditions continued to improve in line with our expectations, and we did downgrade somewhat our expressions of concern about the global risk environment. So I do think that there were hints in the April statement that the Committee was changing its views of what it was seeing in a direction. We continue to say that we think, if economic developments evolve in line with our expectations, the gradual and cautious further increases we expect to be appropriate. And I suppose I was somewhat surprised with the market interpretation of it. But the June meeting minutes—the minutes of the April meeting were an accurate summary of what had happened.”

Of course, that’s a bunch of hooey. Aside from the temerity of Esther George, the April statement read like a chorus of doves cooing in perfect harmony, moving mountains to “remain accommodative” until improvement was seen on both the inflation and job market fronts. And no, there was nary a ‘hint’ that “most” participants felt conditions warranted a June rate hike. The minutes clearly rewrote the history of what took place in the room and were designed to shock and awe, which they did in spades.

As is often the case before moving on, context is key. Recall that there are four FOMC meetings and statement releases that are followed by press conferences and that there are four that are followed by the sound of silence. Though you may be tempted to jump to the conclusion that the four quiet meetings should be ignored, stop for a second and ponder the great opportunities they present to crank up the minutes as a powerful monetary policy tool.

Bank of America Merrill Lynch economist Michael Hanson is a true believer in the minutes’ mojo after being sideswiped by the April meeting minutes. He had this to say in previewing the ‘silent’ July FOMC meeting.

“Perhaps the biggest risk to market pricing will come not from this week’s statement, but from the minutes in three weeks’ time,” wrote Hanson of the August 17th release date. “Recall the sharp market reaction when the April minutes revealed significant support on the FOMC for a possible June rate hike. We see an elevated risk of a repeat with the July minutes.”

It wasn’t so long ago that the minutes were used for the opposite reason, to calm markets, that is. At the conclusion of its September 2014 meeting, the FOMC statement contained the dreaded word, “when,” as in, “When the Committee decides to begin to remove policy accommodation…”

Of course the markets gagged. A rate hike? The suggestion of follow through??

But then, as post-crisis fate always has it (and always will), a mitigating factor presented itself. In this case it was Europe not emerging from its crisis. European Central Bank President Mario Draghi was negotiating to buy bundles of junk-rated Greek and Cypriot bank loans, exacerbating tensions between tight-fisted Germans and the ECB.

And so, the Fed reacted by penning the mother of dovish minutes text, reneging on the September statement’s hawkish tone.

This breathless recap from the Wall Street Journal followed:

 “U.S. stocks soared Wednesday to their biggest single-day gain this year, after meeting minutes from the Federal Reserve suggested the central bank would move cautiously on raising rates. The rally was a sharp reversal from a steep Tuesday drop on worries about international economic growth. U.S. benchmarks spent much of the day hovering around the flat line, after another session of European stock declines. But they surged after minutes from the Fed’s latest meeting unexpectedly showed more focus on slowing growth overseas and lessening inflation pressures.”

At a minimum, investors should be wise to Yellen’s silent-meeting victory. The deployment of the minutes as a monetary policymaking weapon represents a classic Mission Accomplished for the Chair. In a Fed meeting minute, everything can change. But does that make it right? Or should we question the tacit manipulation of Fed policy that’s advertised as being transparent but is anything but clear by design. As the “I’ll get mine first” greed of the ‘80’s again rears its ugly head, who do you think is greasing its wheels?

Last Sighting at the Machus Red Fox

Machos Red FoxDid the mafia assassinate JFK? Was Jimmy Hoffa the man behind the setup? Does the government put fluoride in our water to gain control of our minds? Was the lunar landing staged in a Hollywood studio? Is Elvis alive? Is Paul McCartney dead? Did President Roosevelt plan Pearl Harbor? Does a lightbulb exist that never burns out? Has oil peaked? Are companies brainwashing us with subliminal advertising? Are the Freemasons intent on creating a New World Order? Did aliens land in Roswell? Is everything a conspiracy, including conspiracies themselves? Will we ever know?

Conspiracy theories are a form of high or maybe low mental entertainment. Still, perhaps it’s best to let all of those sleeping dogs lie and focus on what we do know. After nearly a decade on the inside of a highly secretive institution, a.k.a. the Federal Reserve, it came as quite a shock to have several theories assumed to be dreamed up by crackpots validated by fact. Not only are Federal Open Market Committee (FOMC) meeting minutes methodically manipulated, the actual transcripts of the meetings contain overt omissions.

Bear in mind, the Fed was never legally obligated to release the full contents of the audio-recorded transcripts. In fact, it wasn’t until 1993 that the central bank bowed to Congressional pressure to be more forthright about its deliberations. Even so, the five-year lag time (ahem) between meeting and transcript release provides ample time to ensure history is properly recorded.

According to the Fed website, the FOMC Secretariat is quite the taskmaster:

“Beginning with the 1994 meetings, the FOMC Secretariat has produced the transcripts shortly after each meeting from an audio recording of the proceedings, lightly editing the speakers’ original words, where necessary, to facilitate the reader’s understanding (emphasis added). Meeting participants are given an opportunity within the subsequent several weeks to review the transcript for accuracy.”

So the transcriber has leeway to ensure the public is not confused. And participants can make sure they really meant what they said over the ensuing five-year stretch.

News that transcripts are subject to redaction highlights the importance of what is permitted to remain in the public purview. Take this insightful suggestion, recorded as having been said by now Chair Janet Yellen in a transcript from the December 16, 2008 FOMC meeting: “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

In other words, the verbiage of the minutes can be deployed in the same manner as any other tool at policymakers’ disposal. That was presumably good news to the monetary powers that were as their traditional capabilities to relieve the stresses ravaging the economy were pressing their outer limits.

Consider the historic backdrop of the meeting; it cannot be underemphasized. The economy was in full-blown meltdown mode. Lehman Brothers had failed in September followed immediately by AIG being saved. The unemployment rate had hit 6.7 percent and was rising fast: it would peak at 10.0 percent nine months later. Investment activity was plunging as was the stock market on its way to its March 2009 lows. And those home prices the very same Fed authorities said would never decline on a nationwide basis were crashing. Meanwhile, most of the world’s economies were also in recession.

As for policymakers, they stood at the precipice of the unknown. Their conventional tool of positive interest rates had been all but depleted. Recall that Yellen’s words were said at the meeting at which interest rates were voted to the zero bound. Just days before, on November 25, 2008, the Fed had announced plans to begin purchasing up to $600 billion of securities backed by mortgages to try to loosen the vise of nonexistent mortgage credit availability. Unconventional policy had officially left the launch pad.

When the December 2008 meeting minutes were released, with their usual three-week lag, they painted a harmonious picture of camaraderie and congeniality. Take this case in point which elaborates on the collective thinking behind the crossing of the policy Rubicon:

“Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth. Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time.

However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee’s policy framework would return to focus on the level of the federal funds rate.”

It’s hard to believe that nearly seven years have passed lending new meaning to, “remain very low for some time.” As for the federal funds rate at which banks lent each other money in the overnight market, it’s become a financial relic few contemporary bond traders can contemplate.

Not surprisingly, each FOMC minutes release is more anticipated than the last. With the markets and the economist community in sync with their expectation that the Fed is at its first major crossroads in nearly a decade, all hands are on deck.

Few doubts remain about the probability of the first increase in interest rates in nine years on December 16. Some had anticipated that the tragic assaults on the City of Lights would trigger panic in the markets sending the Fed to the sidelines. But that didn’t happen. Confounding many market watchers, the stock market rallied hard on the Monday after the attacks.

The Financial Times’ John Authers tweeted out the following in response to the surreal market behavior: “Paris attacks have had little or no impact on markets so far. Perhaps that’s a little worrying.”

Yours truly re-tweeted Authers’ post adding, “It is unsettling that nothing unsettles markets.”

God help us if the buoyancy in stock prices reflects anticipation that the European Central Bank will expand its own securities purchase campaign to offset the inevitable economic consequences of the terrorist attacks. When will markets wake up to the fact less just might be more in the end?

As for the Fed, it can and will take the opportunity of the release of the minutes of its October deliberations to crystallize its intentions. In deliberately subtle fashion, the lengthy minutes should lean away from an overemphasis on labor market metrics paying after-the-fact homage to the latest job creation figures.

By the opposite token, the persistent weakness in retail sales and manufacturing activity outside of the auto sector should be hinted at. The renewed decline in oil prices, which promises to shrink further the ranks of the handsomely compensated and keep a lid on inflation for a bit longer, can also be alluded to.

What the minutes can’t do is time travel in anticipation of future events. No acknowledgement of the attack on France can thus be on display.

The October meeting minutes are as good as the Fed’s last dance. On this stage, policymakers can reinforce the FOMC statement’s pointed message that December will mark lift-off barring a calamity in the economic data and/or financial markets.

It’s imperative to understand that the Fed is not alone in operating in obscurity. If anything, its international central banking counterparts are less transparent with regard to their decision-making processes.

But that doesn’t make business as usual all good and well. The decisions of central banks directly affect their de facto constituents, especially in a world in which they wield more power than elected officials. The individual contributors who are the building blocks of a country’s economic output can handle, and more importantly, deserve the truth.

Demanding accountability of the Fed is in no way borne of a conspiracy hatched by pot stirrers. It’s one thing for enthusiasts to relish in speculating what became of Jimmy Hoffa after that last sighting at Detroit’s Machus Red Fox restaurant. It’s a much more serious matter to be dismissive of the legitimate need to communicate clearly the method to the “magic” of central banking.