Is The Fed Finally Coming to Their Senses?

FOMC minutes show Fed officials actually worried about lower oil prices.

Bullion.Directory precious metals analysis 18 February, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The FOMC minutes sounded more like something out of the Bank of England (BoE). Officials are afraid to raise rates, which may damage the frail economy. The minutes showed that while some officials want to keep the Fed funds rate where it is, other officials feel that the zero-interest rate policy (ZIRP) has gone on long enough.

FOMC Minutes: Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.

Many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates.

The FOMC still remains divided. Global concerns that could derail any growth in the US are a new addition this time around.

The FOMC minutes pointed out specifically that the growth slowdown in China, financial instability in Greece and growing tensions in Ukraine are potential issues. Global deflationary pressures have also caused a headache for the Fed.

Now, after hearing for months how lower gas prices are great for the economy, the Fed reserved course and pointed out that lower oil price could actually be a bad thing.

Even the Fed Vice Chair Stanley Fisher came out stating the unambiguous positives of lower gas prices, which, in turn, would spur consumer spending.

It did not happen.

There have been steep contractions in retail sales during December and January, which was the worst back-to-back print since 2009. The personal savings rate has also increased, recently.

As I (and a select few) have pointed out – with the destruction that lower oil prices will cause via layoffs – the FOMC finally came around to reality.

FOMC Minutes: Several participants noted that there were signs of layoffs in the oil and gas industries, and that persistently low energy prices might prompt a larger retrenchment of employment in these industries.

In addition, it was observed that if capital investment in energy-producing industries slowed significantly, it could damp the overall expansion of economic activity for a period, especially if the slowing took place after most of the positive effects of lower energy prices on growth in household spending had occurred.

With the shale boom contributing to the vast majority of the jobs created since the recession, further deterioration could cause layoff contagion.

Texas’ economy heavily relies on energy production to fuel its economy, and the Lone Star state was responsible for 24 percent of total jobs created since the “recovery” began. Contagion could spread to other industries, and the real estate market has seen low oil price drawbacks.

Central banks continue to lag behind. The Bank of England, last year, was looking to become the first major central bank to tighten monetary policy. They were benefiting from a string of extremely good economic data, but BoE Governor Mark Carney was too worried about stopping the QE-induced recovery.

Traders bid up the Sterling in anticipation of a rate hike, and they quickly lost their patience.

From a multi-year high of 1.7152 last year, the GBPUSD cratered to a low of 1.49 as economic data came in significantly weaker. If the BoE marginally raised interest rates as strong data was abundant, it would have lifted them off their lower bound, while potentially leaving room for smaller, additional rate hikes.

The Fed followed in their footsteps, and it is hard to picture the dollar stronger based on a potential rate hike.

Eurodollar traders are now pricing in a 53 percent chance of a rate hike in September, down from 62 percent. What happened to mid-Q2?

Gold has weakened, falling under $1,200 per toz.; but, the dovish minutes gave the precious metal a little life. Gold, currently, is trading at $1,210 per toz.

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