Forward Guidance & Economic Lags
Macro Perspectives
The minutes from the February Fed meeting were released yesterday afternoon - stocks went lower.
Remember, some important things happened at this meeting, but forget the minutes, let's look back at the message the Fed sent, in real time, back on February 1st;
They downshifted to a quarter-point rate hike, from an aggressive streak of big hikes.
Importantly, with this quarter-point, they took the Fed Funds rate ABOVE the rate of inflation (the annual change in the Fed favored core PCE index).
Equally as important, the Fed Chair, Jerome Powell, followed that meeting with a press conference that had a clear change in tone.
"Out" was the tough talk. "In" was acknowledgement of the ground that has been covered, the disinflation in the economy, the goal of "real rates" reached.
Add to all of this, after spending the better part of the past year, talking markets down (and therefore tightening financial conditions), he made no attempt to do so in the February post-meeting Q&A session. Keep in mind, stocks had just rallied nearly 10% in stocks over the prior month.
Make no mistake, talking down stocks (destroying paper wealth and confidence) and threatening job security (proclaiming to bring job openings down to align with job seekers) were key parts of the Fed's "forward guidance" strategy. It was effective in crushing the exuberance in the economy, and therefore, turning the inflation tide.
Again, Powell didn't find a problem with easing financial conditions at this Feb 1 press conference.
All of the above was the real-time message from the Fed (with clear intent) following the February 1 meeting - it outweighs the Fed minutes delivered yesterday.
Additionally, yesterday morning, just hours before the release of these minutes, the most hawkish voice on the Fed, James Bullard, echoed the Jerome Powell tone change. He said the economy is strong, the job market is strong, and he did nothing to change the path he has projected for rates (they have "a little ways to go").
"In the age of forward guidance, economic lags make less sense now."
Translation: The market and the economy have already priced in the inflation fight (i.e. the bear market and economic recession - it already happened, last year).
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