Fed says it fell for a ‘head-fake’

The March FOMC minutes indicated a general change in the willingness to recognize a majority of recent economic weakness as attributable to the severe winter weather. Additionally, revisions to data relied upon at the January FOMC meeting and having then prompted a more favored view of economic prospects has tempered the near term outlook and brought the intermediate term prospects more in line with a more moderate than accelerating economic growth path. Below, find some bullet-points that offer insight in how the Fed’s views have changed or morphed:

  • The ‘Staff Review of Economic Situation ‘ made clear that the slowed growth early this year was ‘likely only in part because of temporary effects of the unusually cold and snowy winter weather’. The addition of ‘only’ in the reference to the part of weather in weaker growth seems to highlight a movement toward recognizing more fundamental reasons for economic slowing.
  • In contrast to the Fed Staff’s changed view of the likely depressing impact on growth from severe winter weather they note that ‘market participants’ gave too much consideration to sever weather for impacting growth; ‘Financial market conditions in the United States over the intermeeting period appeared to have been influenced by an easing of concerns about developments in the EMEs but relatively little affected by the generally weaker-than-expected economic data, which market participants appeared to attribute in large part to the temporary effects of unusually severe winter weather.’ This helps to explain some of the post-minute release rally in U.S. fixed income.
  • References to the housing market moved from lessening degrees of improvement to indications of slowing; ‘The pace of activity in the housing sector appeared to soften.’
  • The testing of the overnight reverse repurchase agreement (ON RRP) seems to have been elevated to a little more permanence in it being referenced as an ‘exercise’; ‘The Federal Reserve continued its fixed-rate overnight reverse repurchase agreement (ON RRP) exercise.’
  • In discussing financial conditions, the Fed Staff made a rather interesting unsupported conclusion in; ‘Equity prices were also supported by a broad increase in investors' willingness to take riskier positions, in part likely reflecting an easing of concerns about EMEs early in the period.’ Under different conditions, equity performance might have been attributed excess liquidity.
  • The only lingering inference to potential excess liquidity was a mild acknowledgement to leveraged loans; ‘The growth of commercial and industrial loans on banks' balance sheets increased over the period. Institutional issuance of leveraged loans continued at a brisk pace.
  • The potential pace for output growth is cited for markdown of GDP forecast; ‘Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff's medium-term forecast for real GDP growth also was revised down slightly.’
  • The more moderate intermediate-term growth expectations is also expressed in the staff’s view that resource slack will only dissipate slowly; ‘Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff's medium-term forecast for real GDP growth also was revised down slightly.’
  • Finally, the staff provided some confidence measure in their assessment of the certainty surrounding their view. While few staff members likely have as lasting a presence at the Fed as the 20 years suggests, the group offered; ‘The staff viewed the extent of uncertainty around its March projections for real GDP growth and the unemployment rate as roughly in line with the average of the past 20 years.’
  • Meeting participants seemed to express a slightly greater appreciation than the staff that severe winter weather impacted recent growth; ‘In their discussion of the economic situation and the outlook, participants generally noted that data released since their January meeting had indicated somewhat slower-than-expected growth in economic activity during the winter months, in part reflecting adverse weather conditions.’
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