Weekly Reading List for 10/25/22

FOMC Minutes Released October 12, 2022

A little on the longer and dryer side but worth the read if you want to know more about what the Fed is thinking and what their future actions might hold. These meeting notes were from their previous policy meeting held on September 21-22 but do not get released to the public until a few weeks later. Below are some highlights from the meeting minutes.

From page 4

• “The information available at the time of the September 20–21 meeting suggested that U.S. real GDP was increasing at a modest pace in the third quarter after having declined over the first half of the year.”
  • The Fed continues to see a relatively strong US economy as a backdrop to their rate hiking cycle. Although they are seeing some signs of slowing. Nothing they have seen yet gives them any pause to slow or stop rate hikes
• “Credit remained widely available to most types of borrowers but increases in borrowing costs appeared to damp the demand for credit in some markets in recent months.”
  • There still appears to be liquidity available in the overall credit markets. Although overall demand is beginning to wane as interest rates make it cost prohibitive.

From page 5

• “Broad equity price indexes decreased slightly, on net, as substantial early gains arising from investors’ improved perceptions about the inflation outlook and better-than feared second-quarter earnings were more than offset by later losses arising from expectations that the Committee would follow a more restrictive policy than previously expected.”
  • The committee acknowledges that the market seemed to get ahead of itself with the late summer rally. They also acknowledge the role they played in the messaging of the continued restrictive policy from Powell’s Jackson Hole speech and the effect it had on equity markets through the end of last quarter.

From page 6

• “…but about half of the respondents in the Federal Reserve Bank of New York’s Survey of Consumer Expectations indicated that it was harder to obtain credit than it was a year earlier and that they expected it to become even harder over the next year.”
  • This sentiment was echoed throughout the meeting minutes in many ways. This is driven from both costs becoming more prohibitive. Also banks and lending firms beginning to tighten their credit standards.
• ” Although the staff continued to project that core inflation would step down over the next two years—reflecting the anticipated resolution of supply–demand imbalances and a labor market that was expected to become less tight—core inflation was revised up in each year of the projection.”
  • The Fed is acknowledging their belief that the rate hikes and reducing of liquidity in the market is having its desired effect. Even though it is currently going slower than originally projected. Another interesting piece to note is the Fed explicitly saying they expect inflation to take about 2 years to reduce to the long term target!

From page 9

• “Many participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective.”
  • Last, this note from committee participants which flies in the face of a potential Fed pivot. Many participants acknowledging that even if the rate hikes were to stop. Given the current macro situation the Fed would likely maintain a heightened rate level for the foreseeable future.

Another part of the Feds fight against inflation is the reduction of its balance sheet to remove liquidity from the markets

This is currently being done at a rate of ~$95B per month

• $60B in treasuries
• $35B in agency debt and mortgage-backed securities

As seen in the chart above this is now starting to show a noticeable (but small) reduction to the balance sheet.

As the fed continues to let these assets runoff it will be important to monitor underlying liquidity.

UK Prime Ministers with the Shortest Term Length | visualcapitalist.com

Liz Truss’ record breaking run as prime minister. Lasting for only 44 days!

In her final days in office she even failed to remain in office for less time than a head of iceberg lettuce remained fresh

• “On October 14, amid the chaos in the Conservative Part, the Daily Star began a live stream that hoped to answer the questions ‘Will Liz Truss still be prime minister within the 10-day shelf life of a lettuce?’”
• Daily Star’s head of lettuce outlasts Liz Truss’s time as Prime Minister (yahoo.com)