USAGOLD/Peter A. Grant/04-06-17
Gold continues to consolidate within the recent range, awaiting tomorrow’s jobs report and news of this weekend’s meeting at Mar-a-Lago between President Trump and China’s President Xi. Silver is consolidating at the high end of its range as well, still within striking distance of the high for the year — set in February — at 18.48.
The minutes of the last FOMC meeting, released late yesterday, were rather interesting:
The Fed acknowledged that the stock market was overvalued. According to the Fed, “Some participants viewed equity prices as quite high relative to standard valuation measures.” That’s couched FedSpeak for “bubble”.
While the Fed still seems to be on track for multiple rate hikes this year, whether there are two more or three more is still subject to some debate. Additionally, there was the first real hint of balance sheet normalization, although they only talked about talking about it:
Participants also generally agreed that the Committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated. — Minutes of January 31-February 1, 2017 FOMC meeting
The media latched on to this point, trumpeting that the Fed wants to start unwinding its massive $4.5 trillion balance sheet. At this point anyway, they haven’t agreed to anything other than future discussions about maybe winding down reinvestments. Balance sheet normalization is likely to be a long drawn-out process.
The NY Fed (they run the balance sheet) projects full reinvestment will continue through mid-2018, after that they will be phased out over the next year. Normalization of the balance sheet is expected to occur in late 2021.
The Federal Reserve’s securities holdings then decline until the portfolio reaches its normalized size in the fourth quarter of 2021. At that time, the domestic securities portfolio is estimated to be about $2.8 trillion, with a slightly higher concentration in Treasury securities than in agency MBS. — NY Fed
So, it looks like the plan is to only take the balance sheet down by about $1.5 trillion over the next four years to 2011/2012 levels and calling things “normalized”. However, we’re already overdue for a recession, which would likely change everything. Ah, the best laid plans . . .
There is also speculation that the Fed would likely slow rate hikes if they shifted focus to the balance sheet. Either way, whether by rate hikes or balance sheet unwinding, the recession risk is amplified as monetary policy is tightened.
Former Fed insider Danielle DiMartino Booth wonders if Trump appointments to the Fed might change things as well:
It’s just a hunch, but a less-threatened Fed could just as easily be expected to back down on shrinking the balance sheet. Given where the economy looks headed, newly empowered doves might even be inclined to grow the balance sheet anew. — Danielle DiMartino Booth.
Mentioning balance sheet unwinding may just be a bone tossed to the hawks. We’ll have to wait and see if there is further and more serious discussion at future meetings. For now though, uncertainty abounds and broaching the subject seems to have further muddied the guidance.