If you missed it, here’s Part 1 of this report. I was going to use the same headline and just call this part 2, but as I was doing my usual first rewrite to tweak the structure, something new dawned on me. I had to largely rewrite the post. And that called for a new headline.
While the mainstream media focuses on the interest rate issue, if you’ve been reading Suremoney for a while, you know the rates thing is a red herring, anyway. The only thing that really matters is the bloodletting, as the “normalization” of the Fed’s balance sheet currently drains $50 billion per month from the system. Well, that and the fact that the Treasury is sopping at least $100 billion in cash out of the market every month.
In its 25 paragraph report about the FOMC December meeting minutes, the Wall Street Journal was silent on this until the 22nd paragraph. It essentially buried what should have been the lead of the report, instead giving the issue just a few offhand comments.
Here’s their comment. The added emphasis is mine.
“Separately, the minutes showed the Fed made more progress but reached no final decisions around how and when it will stop shrinking its $4.1 trillion portfolio of bonds and other assets. The minutes indicate officials aren’t looking to slow the winddown as part of their policy stance, a change advocated in recent weeks by some prominent investors and Mr. Trump.”
In fact, I saw no discussion at all about slowing the rate of draining as I read through the minutes. Only in recent days have numerous Fedheads, including head honcho Powell, begun discussing that possibility. These remarks, while clearly scripted, have come up since the December FOMC meeting.
It’s a new wrinkle that we’ll definitely need to pay attention to because it establishes a bit of a timeline. But I’m not worried about it yet, in terms of changing my outlook. Normally it takes 6 to 9 months after the Fed starts trial balloons for the idea to make its way into policy. And each time the market rallies like this, that takes the pressure off the Fed to do anything. Rallies like this one just push any Fed policy counteraction further over the horizon.