Our takes on minutes from Fed meeting

This past Wednesday, the Open Market Committee of the Federal Reserve (FOMC), the arm that determines the direction of monetary policy released the minutes from their January 3031 meeting. Two things were of note, the contents of the minutes as well as the impact they had on the financial markets. Keep in mind that many suggest, as do we, that the recent volatility in the market has much to do with the recent rise in interest rates along with the confidence investors have in the ability of the Fed to handle any looming inflation. The Fed’s outlook for the economy released within these minutes helps to provide answers to these concerns.

Of note, the dual mandate of the FOMC is to promote maximum employment, stable prices and moderate long-term interest rates.

Under Staff Economic Outlook, the minutes note that “the U.S. economic projection prepared by the staff for the January FOMC meeting was stronger than the staff forecast at the time of the December meeting. Real GDP was estimated to have risen in the fourth quarter of last year by somewhat more than the staff had previously expected, as gains in both household and business spending were larger than anticipated.”

Our take – the above suggests the Fed may be behind the curve when it comes to addressing their dual mandate noted above. The danger of this may be more frequent interest rate hikes in the future than investors have thus far anticipated. This would be negative for stocks. That said, for a variety of reasons, mostly due to technological advances in the manufacturing as well as the distribution of goods and services, we do not believe we are on the cusp of a dangerous spiral in inflationary pressures.

“Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar.”

However, the Fed is remaining conservative regarding its outlook on inflation as “the staff projected that core inflation would reach 2 percent in 2019 and that total inflation would be at the Committee’s 2 percent objective in 2020.” Two percent real inflation is the “stable price” component of the mandate noted above.

Investors, both professional and retail alike must keep a close eye on inflation data as it is released within the Consumer Price and Producer Price Indices. This data will provide a glimpse into whether or not the Fed may be behind the curve. Once again, at the current time we do not believe this is the case.

Finally, regarding future movements in monetary policy, the minutes stated that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.”

Our take – investors should take their cue from the yield on the 10-year U.S. Treasury note. A sharp rise in the yield would be a signal that the Fed will be more aggressive in addressing any inflationary pressures and may be behind the curve while a modest increase would suggest the monetary policy objectives currently pursued by the Fed is appropriate for the economic environment at the present. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518-279-1044.