Notes From Underground: When Doves Coo

Wednesday’s FOMC statement and press conference was as dovish as we have heard in many moons. More importantly, the VOTE WAS UNANIMOUS. Even Kansas City Fed President Esther George voted with the group. Why was this dovish?

Three issues come quickly to my attention. First, the Fed will begin tapering its balance sheet unwind in May, reducing the cap on Treasury reinvestments to $15 billion from $30 billion. (The MBS reinvestments, however, will remain at $20 billion.) In addition, the Fed said the unwind of its Treasury holdings will end in September, while the MBS holdings continue to run off. Second, this came all while the Fed adjusted its dot plot to reflect no rate hikes in 2019. Lastly, I believe that the amount of time Powell dedicated to the global economy was the most I have ever heard.

The FOMC statement said the following:

IN light of GLOBAL ECONOMIC and FINANCIAL DEVELOPMENTS and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

CNBC’s Steve Liesman asked a poignant question about the global economy that forced Chairman Powell to provide context surrounding the concern about the slowdown in the global economy. Powell maintained that the global economy in 2017 was in a synchronized growth mode but by the second half of 2018 Europe had slowed dramatically and China began to slow as the deleveraging policy put in place had begun to restrain its economy. Powell did not see TARIFFS as the mainstay of China’s slowing but rather the deleveraging. The FED is CAPTIVE TO THE GLOBAL ECONOMY AS IT NEEDS TO BE CONCERNED ABOUT THE EFFECT OF SHRINKING LIQUIDITY ON THE MASSIVE AMOUNT OF GLOBAL DOLLAR DEBT.

As NOTES FROM UNDERGROUND has long maintained, the FED has a triple mandate: employment, inflation and the health of the global financial system. In response to the FED‘s DOVISH decision, the DOLLAR weakened and is sitting a levels that are important for DOLLAR bulls. The GOLD rallied from its weakness early in the day but still needs to challenge the highs made four weeks ago. The yield curves continued on their recent path. The 5/30 curve made a new 52-week high while the 2/10 flattened to 14 basis points. As Jim Grant opined, if the FED’s policy is correct, why do the short-term curves keep flattening? The S&Ps rallied on the initial dovish responses but by the end of its session actually closed lower on the day, with the NASDAQ remaining bid.

There is a lot to consider here but I leave you with one last point Powell raised: Labor force participation seems to be a FED concern as U.S. data is weak relative to other developed countries. The FED wants higher participation and reminded investors that WAGE INFLATION IS NOT THE FED’S CONCERN, BUT PRICE INFLATION IS THE MANDATE. Why then do we give average hourly earnings such an important place in the employment release? The question someone should ask POWELL: Is the Phillips curve dead, especially in regards to a slowing global economy which will bring pressure to keep wages low across the globe? The FED appears to be cooing in unison.

***A note to my readers: I will be featured on Convergent Trading at 3:30 p.m. central time on Thursday. Please click the link to register:

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17 Responses to “Notes From Underground: When Doves Coo”

  1. Guy Williams Says:

    Excellent. Thank you Yra.

  2. Don H Says:

    /GC Buyers will need to regain & hold a bid above 1325 for any attempt to retest those recent highs; IF Sellers hold, then anticipate another Southbound rotation. Spoos remain bullish above 2814.50; a break below there signals a deeper pullback…imho

  3. asherz Says:

    “Why then do we give average hourly earnings such an important place in the employment release?”
    The reason is quite clear. The consumer contributes 70% of GDP and if wages grow so will spending and the economy. Price inflation and the Phillips Curve are not the villains to avoid. What the Fed especially with Bernanke and his cohorts fear most is…
    DEPRESSION. With global debt levels where they are, further QEs which will surely follow in slowing economies, will become less effective. Lowering interest rates will also have less potency in that environment. The third undeclared mandate, the markets and the banking system, is the only mandate of concern right now to those who created the mess we are in.
    A 16th century aphorism became commonly quoted in the Great Depression.
    “You can bring a horse to water, but you can’t make him drink”.
    The euphemism that has crept into these Fed
    announcements, “patient” for freezing interest rates, long predicted on this blog for 2019 when others were looking for further increases, is having less and less impact. At some point so will lowering interest rates which we will see in the not distant future. The arrows in the quiver have been blunted.The horse is not thirsty and his snorting sound is of concern to the Central Bankers.

    • yraharris Says:

      Asherz–we are where Schumpeter warned—pushing on the string.The FED needs to be fearful of 1937 as Bernanke proudly proclaimed

  4. asherz Says:

    Comments on Fed announcement from Zero Hedge with charts.

    • yraharris Says:

      Asherz—thanks but the question will be when will the Fed act to cut the Feds overnight rate to address the issue

      • asherz Says:

        Yra- Soon, with 5 year and two year inverted to three month bill. My guess next meeting.

  5. Rob Syp Says:

  6. Robert Sypniewski Says:

  7. Richard Papp Says:

    The closing recovery high of the Dow Transports of 12/3/18 10,850.44 is still intact (as opposed to the Industrials). Recently we had 15 consecutive trading days of the Tranies where there was 3 or less up days. This is not a common occurrence with a major average.
    This happening has been referred to as ” Urgent Selling” by James E Alphier in a Feb, 26, 1979 Barron’s article. In addition, he talked about it’s possible significants.
    If anyone knows a postgraduate finance student looking for a topic to study and update…………….

  8. ShockedToFindGambling Says:

    Bank stocks are the best indicator of strength in the U.S. economy…..they look to have turned down and the SP500 should follow.

  9. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Hi Yra-
    The interesting bit is as you noted: the extent of the Fed adjustment to global conditions, rather than a less pronounced further dovish shift. Yet this is just the culmination of what I referred to this morning as a ‘Central Bank Harmony Choir’ in my research note.
    And rather than a fresh revelation, this is merely the denouement of a long global weakening story where some have failed to appreciate the impact of higher tariffs and lower international trade on the US.
    That has been clear to anyone who takes serious monthly OECD Composite Leading indicators. The latest ( was pre-amplified in its early March quarterly Interim Economic Outlook
    And Draghi’s exposition from 24:30 into the MAR 7 ECB press conference ( and especially 31:30 on sustained growth that is still slowing) was the dress rehearsal for pretty much exactly what Powell and the Fed have now said.
    While it was indeed extensive, anyone who was shocked by the general trend of current Fed policy has just not been paying attention for the past several months. As one clever wag recently put it (paraphrased), “The US is just the tallest pygmy, waiting to achieve awareness of just how short it is” (right now.)

  10. Pete Says:

    Yra, do you know anything about the BIS approving gold as a monetary asset sometime this spring? Pete

    • yraharris Says:

      Pete–that was a question asked on Thursday’s session with Morad on convergent trading—-I am doing some reading from the BIS website but I can not ascertain it as a total zero risk weighting equivalent to sovereign debt—if anybody can add to this please inform our readers

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