Fed's Fault - Risk Off

Very much a risk off session in Asia.  Blame the Fed for revealing what we already knew.

We'll come back to that in a sec.  Let's take a look at the markets. At 06.45 BSTASX (-0.8%)Nikkei (-1.05%)KOSPI (-3.6%)!!King Dollar has returned! For now at least. DXY back above 93. GBP fell back below 1.31, EUR hit 1.1820, & JPY back above 106.European markets are set to open lower;

 European Opening Calls:#FTSE 6033 -1.29%#DAX 12806 -1.32%#CAC 4906 -1.43%#AEX 553 -1.35%#MIB 19834 -1.10%#IBEX 6998 -1.35%#OMX 1753 -1.24%#STOXX 3272 -1.37%#IGOpeningCall— IGSquawk (@IGSquawk) August 20, 2020 

So, Wall Street closed lower yesterday after the Fed minutes "disappointed".But did they really? The meeting took place three weeks ago. The minutes are consistent with the comments that we have seen from Fed members since.This disappointment narrative centres around the idea that markets were positioned for a clear consensus among Fed members to take action(s) at the September meeting.This article (from the 17th of August) gives us some prior context; Fed Close to Making Its New Inflation Strategy Official (BBG)

The Federal Reserve will soon reveal a subtle yet profound shift in how it conducts monetary policy for the world’s largest economy, officially embracing a more relaxed view on inflation.

Now they’re close to presenting the results -- perhaps as soon as September.

“It will signal clearly to the market that not only will the Fed tolerate inflation temporarily above 2%, but that it favors it, and will try to aim in that direction,” said Mickey Levy, chief economist for the U.S. and Asia at Berenberg Capital Markets.

Several other economists interviewed made precisely the same prediction and agreed that many Fed officials have already been pursuing that strategy for months. Investors also see it coming.

Two days later, we get this;

“With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point”

Bloomberg noted;

That was a subtle change from the previous set of minutes indicating policy makers were keen to sharpen their so-called forward guidance “at upcoming meetings.”

So subtle, it's barely noticeable. This "disappointment" really shouldn't last. Everyone knows what's coming, it's a matter of when, not if.That said, the market is looking highly strung here, and a tantrum seems likely if the Fed don't deliver some clarity between now and the September meeting.   Jackson Hole (27-28th August) will provide a clearer picture of what to expect.

Yield Curve Control will keep cropping up.

Even though their public comments have been consistent (that YCC "offers few benefits"), this was somehow a surprise;

"A majority of participants commented on yield caps and targets as a monetary policy tool...  Most judged that yield caps and targets would likely provide only modest benefits in the current environment"

The current environment being the end of July.

 🇺🇸💡 Worth noting that these are minutes from a meeting that took place on the 28th/29th of July after a period when yields had been crush and the curve was getting flatter by the hour

That's not been the case since.. pic.twitter.com/YiUt31B85d— PiQ (@PriapusIQ) August 19, 2020 

YCC has not been ruled out.  "many participants judged that yield caps and targets were not warranted in the current environment but should remain an option" It just isn't seen as the right time yet.If/when bond markets start selling off with conviction, the Fed's hand will be forced, but (understandably) there seems no appetite to pre-empt this.