Ecoinometrics - Is the FOMC looking for reasons to continue hiking rates?

Or the perils of making decisions based on fear.

The FOMC minutes are out and the message coming out of it is clear. Despite headline inflation being on the decline the Federal Reserve is worried. If prices don’t stop increasing the Fed could soon be seen as not credible by US consumers. As we’ll explain that could be a big problem.

Also in the second part we take our weekly look at Balaji’s Bitcoin bet: will Bitcoin reach $1m by June.

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Is the FOMC looking for reasons to continue hiking rates?

The Federal Reserve has three tools:

1. They control the Fed Funds rate which means they control short term interest rates.

2. They can inject money into the system by buying various debt instruments. That’s what is referred to as the Fed’s balance sheet.

3. They can make speeches and pronouncements on how they will use (1) and (2).

Obviously (1) and (2) are the real deal when it comes to actions. But in case you haven’t noticed yet, a lot of what’s going on in the economy depends on psychology. So actually (3) goes a long way in helping the Federal Reserve achieve its goals.

But what the FOMC minutes reveal is that the Fed is worried about the erosion of this third power if they don’t get inflation under control fast enough. 

Before we get to that let’s step back a minute.

When you look at the current state of the US economy, what are you afraid of the most? Slowing growth, commercial real estate crisis, an upcoming recession more severe than most investors are anticipating?

For the FOMC the list is basically:

• Inflation.

• Banks.

And banks only to the extent that if there was a serious banking crisis it could prevent the Fed from fighting inflation the way they want. 

We conduct some keyword analysis on the FOMC minutes every time they are published to extract what are the most important topics covered in the discussions.

That’s what you can see on the chart below with the key topics broken down by colour:

• Inflation is in red.

• Everything about the job market is in orange.

• Themes around banks and the banking system are in green.

• Usage of the vocabulary of risk is in light blue.

• Mentions of a recession are in dark blue.

The larger the area of a given colour the more the FOMC minutes discussed the given topic. As you can see on the chart inflation is unmistakably the number one worries of the Fed as they state it.

So while a big part of the market is already dreaming of pivot this is not what the Federal Reserve is trying to signal. 

When you read the FOMC minutes what are they saying explicitly?