The Fed Minutes, Inflation, and Personal Biases

The minutes from the most recent FOMC meeting were released on Wednesday, and it revealed mostly what we already knew. The Fed doesn’t see the need to raise or lower rates at this time. Even though investors pretty much knew this, the market rallied after the release.

With investors seemingly more interested in the Fed than actual company related news, the minutes seemed to confirm a dovish stance from the Fed. One key comment in the minutes stated, “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.”

One of the reasons the Fed felt comfortable pausing the rate hikes from last year was that inflation had essentially hit its target last year, but “it was noteworthy that it had not shown greater signs of firming in response,” according to the minutes.

For months, if not years, we have been hearing that the Fed would be data dependent in terms of deciding on future rate changes. With that being said, another statement from the minutes said the course “could shift in either direction based on incoming data and other developments.”

President Trump and a few other officials have been calling for a cut in rates, but the FOMC has made it clear that it won’t cave to political pressure to determine the rate path.

Most of the content in the minutes was known and shouldn’t have surprised anyone, but investors took it as a positive report. There wasn’t really any bad news or good news in the minutes. In another article for Bull Market Rodeo published earlier this month, I pointed out how investors were possibly viewing bad news as good for the market because it would keep the Fed in the dovish stance.

Investors also seem to be ignoring a couple of reports from this week that could be bad news for the market. The Consumer Price Index was released on Wednesday, and it showed prices at the consumer level rose by 0.4% in March and that was higher than the estimates and it was higher than the 0.2% increase in February. The CPI was flat in November, December, and January.

The annualized rate for CPI for the 12-month period that ended in March was 1.9%. The Fed’s inflation target is 2%. With the jump in CPI in March, the Fed’s inflation target is seemingly being met. This means the likelihood of a cut is very minimal at this time.

The other side of the inflation equation was released on Thursday and the Producer Price Index showed prices at the producer level jumped 0.6% in March. That was also higher than the estimates and higher than the 0.1% increase in February. The PPI showed 0.1% declines in December and January and another 0.1% increase in November.

The overall PPI for the 12-month period ending in March was 2.2%. The annualized rate for the 12-month period that ended in February was 1.9%. These figures are also in line with the Fed’s target inflation rate.

Here’s what surprises me—if the FOMC minutes were a positive for the market, why aren’t the CPI and PPI reports bad news for the market? And in reality, they aren’t bad news—they simply show that inflation is in check and that the Fed is in a comfortable place with rates. There isn’t any need to lower rates and there isn’t a need to raise rates.

I guess what it boils down to is perception. Each person perceives news with a slight bias based on their own beliefs. I was reminded of this earlier this week when I was looking for the info on the NFIB Optimism Index. When I entered “NFIB Optimism Index” into my search engine, the following image is what I saw.

Look at the headlines from these three different sources. The first one says the index rebounded and showed solid growth. The second one says the index stalled on a weak outlook for growth. The third one is probably the most neutral and says it like it really is—there was a modest increase in the index in March.

Investors are perceiving news based on their own bias. That can be a dangerous thing to do. I would encourage you to view the news with as little bias as possible when it comes to making investments.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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