line by line (some lines omitted)

  •  labor markets have softened further, financial markets under considerable stress
    • any mention of softening labor markets is usually bullish for MBS
    • "financial markets".  no duh
  •  several factors likely to weigh on economic growth
    • this is MBS bullish in general, although further housing woes is not necessarily the best, but since it is a given in this market it does not have a major negative impact
    • inclusion of the verbiage "next few quarters" is significant because it is an ambiguous time frame that could be construed to be as much as a year.
  • SUBSTANTIAL easing of monetary policy + ongoing measures for liquidity
    • whoa nellie!  MBS likes it.  This can be re-written as "we'll keep doing things like helping chase buy bear, helping BofA buy CW, open discount window to GSE's, etc..." 
    • In a data vacuum, this phrasing alone would go a long way to sparking an MBS rally in the ensuing days as it is more evidence for the assertion that agency MBS have implicit backing (albeit VERY VERY indirectly) from Uncle Sam.  "GSE's!  The Diet Coke Of Govies!"
  • Inflation has been high
    • It's interesting for them to "come right out and say it."  BUT it's significant that the predicate was linked with the verb "has been."
    • They follow this up by saying "indicators of inflation expectation."  What an ambiguous clause.  What is an indicator of expectation?  Very carefully chosen words here!  The INDICATORS are elevated, but the FED did not explicitly state that EXPECTATIONS are elevated yet.  VERY important there, and probably part of the reason we did not see MBS sell off on such "black and white" verbiage otherwise.
  • Committee expects inflation to moderate
    • good, MBS thanks you!
  • Inflation remains HIGHLY uncertain
    • very strong verbiage from a normally equivocal fed.  Thankfully it takes no strong position in one direction or the other, but rather a firmly placed cheek or two right on top of the proverbial fence.  "highly" has little or no effect because the predicate adjective is "uncertain."  So it's basically a time bomb that might or might not go off, so it's impact on trading will be deferred until a more definitive position is available.
  • Even though growth might slow further, inflation risk is a significant concern
    • again, duh... Everyone already knew this.

Notice no "outside the box" verbiage in the last sentence.  Not any clear indication as to which between growth or inflation, is the fed's higher concern based on this last paragraph.  HOWEVER, there is another VERY important clue as to that debate.

If inflation was firmly believed by the committee to be "a clear and present danger" as opposed to "a very important aspect of monetary policy that is very volatile and must be watched closely," then we probably would have seen more than one dissenting  vote.  Besides, we know Fisher would still vote for rate hikes even if the basket of CPI goods returned to 19th century levels (not that it was tracked back then).

All in all, this statement gave the markets more or less exactly what they expected.

  • growth is tough
  • inflation is really really scary but we've only seen it's dorsal fin, and for now, the Orca is still seaworthy
  • Fed's probably going to continue to be willing to be "creative."


Bonds reacted very flat at first.  then improved to almost 100-04.  But stocks have rallied so much (dow almost 300) that some money is getting pulled out of bonds now with MBS now down to 99-30.  If you're like me, you'll see this rally as a sugar high from the nominally copasetic verbiage.  And you'll also think that once the high wears off, Ms. Dow might not look so good in the morning.  The thesis here is that independently of stocks and capital flow constraints, the text is MBS bullish. 

But unfortunately, for now, you may see a reprice for the worse due to the stock markets lemming-like bullishness.  Sorry to be the bearer of bad news there, but long term floaters are probably safe staying in the boat.