Stuck In The Box - A Review Of The Federal Reserve's December Meeting Minutes

Still In The Box – A Review Of The Federal Reserve’s December Meeting Minutes

All eyes have been fixed on the Federal Reserve over the past year, with investors and markets earnestly searching for cues as to where we might be headed – soft landing, crippling economic recession, or something in between.

Predicting the severity of the landing may not be practical (for us or the Fed), however, we can look toward the available signals to assess how the Fed might move forward in the more immediate future – which can help us better prepare for the most likely market scenarios.

Federal Reserve officials held a policy meeting on December 13th and 14th. The recently published meeting minutes indicate that they are:

  • Still firmly in the inflation fighting mode.
  • Still “in the box” and trying to balance risks to inflation vs. risks to the economy.
  • Dealing with inconsistent reports about the labor market.
  • Unsure as to where the economy is headed and will react to incoming data.
  • Asking: “Please markets, do not get exuberant about a “Fed pivot”. It makes our job harder.”

Some direct quotes from the minutes:

  • “…job growth in 2022 may have been weaker than indicated…”
  • “…there was considerable uncertainty around the consumer spending outlook.”
  • “…the labor market had remained very tight…elevated nominal wage growth.”
  • “…inflation data for October and November showed welcome reductions…but they stressed it would take substantially more evidence of progress…”
  • “…uncertainty associated with their economic outlooks was high…weighted to the downside.”
  • “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
  • “…an unwarranted easing in financial conditions, especially if driven by a misperception by the public…would complicate the Committee’s effort…”

And paraphrasing their own description of the box they are in:

“One risk…continued inflation eroding the purchasing power of households, especially for those already facing difficulty making ends meet.  The other risk…monetary policy could end up being more restrictive than necessary, lead to recession, potentially placing the largest burdens on the most vulnerable groups of the population.”

Regarding the job growth statistics, we turn to the Federal Reserve Bank of Philadelphia report for employment statistics for the quarter ended June 30, 2022.  “In the aggregate, 10,500 net new jobs were created during the period…the U.S. Bureau of Labor Statistics estimated net growth of 1,047,000 jobs for the period.”  Statistical variances such as this simply thicken the fog the Federal Reserve is driving through.

Nothing in the minutes contradicts our observation in our recent market commentary that “Optimism for a ‘Fed pivot’ should be considered judiciously”.

What Does This Mean For Our Portfolios?

As we’ve said in the past, the investment team at Advanced Asset Management Advisors will continue to diligently monitor and evaluate the markets, positioning our portfolios accordingly. In our equity portfolios, we remain focused on large cap companies, tilted toward defensive sectors (Healthcare remains a standout), with an emphasis on earnings. In our fixed income portfolios, we remain positioned in short-term and high-quality debt instruments to reduce the risk to principal that occurs in a rising rate environment.

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

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