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posted on 20 August 2016

In A Fed Meeting Minute Everything Can Change

by Danielle DiMartino Booth, Money Strong

Article of the Week from Money Strong

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?

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