Yesterday, what many strategists had believed would be a quiet release of minutes from the Fed’s Jan. 31 meeting was, in reality, anything but. Once the market had deemed that the Fed had released another batch of neutral “goldilocks” minutes, the Dow powered higher, climbing 300 points before, upon closer reading, investors abruptly changed their minds and decided that four interest-rate hikes in 2018 (with Goldman even saying 5 are possible) – one more than the central bank had anticipated in December – was the most likely scenario. This sent stocks spiraling lower during the last 90 minutes of trading, forcing another close in the red.
So perhaps it’s unsurprising, given the events of yesterday, that St. Louis Fed President (and FOMC non-voter in 2018) James Bullard appeared on CNBC’s Squawk Box this morning to try and talk the market back from the ledge. Bullard is one of the most – if not the most – dovish regional Fed presidents, and is best known for casually hinting that QE4 is just around the corner any time stocks suffer a sharp selloff.
Granted he could not do that this time, but he did push as far as he could, and futures traders, desperate for good news after Goldman Sachs anticipated last night that the Fed could even hike rates five times this year, bid the market higher after the regional Fed president said that “everything would need to go perfectly” for the central bank to hike rates four times this year.
Bullard told CNBC that the central bank needs to be careful raising interest rates this year, lest a policy mistake choke off economic growth and trigger the beginning of the next (long overdue) downturn. He cautioned that the Fed must continue to take its cues from the economy, which, despite the inflation furor triggered by signs of rising wages earlier this month, is still exhibiting only minimal price gains.
The Fed should shift from “reactive” to “proactive” only if inflation reaches or surpasses its 2% target with further price gains expected. The inflation story still has “a way to go”, Bullard added.
Market-implied expectations for the number of rate-hikes in 2018 surged to new cycle highs (2.82 hikes) shortly before yesterday’s minutes were released.
To Bullard’s credit, the Fed still is completely clueless why wages aren’t rising faster, as the excerpt from yesterday’s minutes revealed:
During their discussion of labor market conditions, participants expressed a range of views about recent wage developments. While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data. With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of onetime bonuses or variable pay rather than a permanent increase in wage structures. It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low. That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.
And judging by all US equity futures turning green after Bullard’s appearance, it appears that mission was again accomplished.