Fed Minutes Were Largely A Non-Event

In my view, there was little surprise in the FOMC Minutes. The Minutes indicate a rate hike may occur as soon as the mid-June meeting however with the caveat that “it would be prudent” to wait for evidence that the recent slowdown in economic activity had been transitory, as has been the case. The Minutes also indicated a plan that would gradually shrink the Fed’s $4.5 trillion balance sheet.

At the time of this writing, Fed fund futures are suggesting a 90% chance of a hike occurring in three weeks. Last week, the odds fell to under 80%, the result of the political turmoil in Washington.

Many times I have commented a major reason for an average annual growth rate of 1.8% since 2001 is the result of virtually nonexistent monetary velocity. As noted, the monetary velocity or the turnover of money is at levels not experienced since 1959.

Excess bank reserves are gargantuan, over $2 trillion versus the historical average of $1 billion.

I will argue that if velocity accelerates, so will growth. The vast majority of the Treasury yield curve now has negative yields, an environment historically associated with inflationary growth.

What are the odds August 2017 will be the inverse of August 2008? At the conclusion of the July 2008 FOMC meeting, the Committee indicated the risks were on the upside. Two weeks later, the Fed reduced the overnight rate, the first time the FOMC took action in between meetings in many years because of the emerging financial crisis.

Most are extrapolating the last 10 years into the next 10 years, stating a 3% annual growth rate is virtually impossible for the intermediate future. As widely noted, from 1945-2001 the economy grew at an average annual growth rate of 3.0%

I reiterate, if monetary velocity accelerates for reasons discussed many times, 3% may be too low of a target. Wishful thinking? Who ever thought President Trump would be regarded as the Hope and Change President as indicated by virtually every sentiment indicator. Such will increase the uncaging of the proverbial Animal Spirits.

Last night the foreign markets were mixed. London was down 0.02%, Paris was down 0.08% and Frankfurt was down 01.6%. China was up 1.43%, Japan was up 0.36% and Hang Sang was up 0.80%.