Three Key Takeaways from July FOMC Minutes
The minutes of the July FOMC cemented the dovish view that the market had of the meeting and caused a further unwinding of December rate hike expectations. There was not much in the way of new information, but the further details added proved important, especially details regarding the balance sheet, inflation, and financial conditions.
1 – Balance Sheet
While some of the FOMC members were comfortable announcing balance sheet adjustment at the July meeting, “most preferred to defer that decision until an upcoming meeting†– such as September. This encourages the widely held view that the Fed will announce the beginning of its balance sheet adjustment at the September 19th-20th meeting. This aspect should be broadly Dollar positive, but in the context of the general tone of the minutes was unable to provide support.
2 – Inflation
The minutes showed that FOMC members had held a thorough debate around inflation and the path of future rate hikes. It is worthwhile to mention that at the July meeting, FOMC members had not yet seen the latest inflation reading (for July) which showed that just a single component (lodging away from home) was responsible for almost all of the downside surprise in core inflation. Nevertheless, at the point of the July meeting, core inflation had undershot expectations for four consecutive months (now five).
The minutes said that “most continues to anticipate that inflation would stabilise around the Committee’s 2% objective over the medium term†but that “many participants, however, saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downsideâ€.
Members considered a number of issues that could be contributing to the weaker inflation environment including “idiosyncratic factors†and technical issues such as “residual seasonality†in PCE price inflation. Other reasons included were items such as whether inflation expectations are well anchored, the usefulness of the relationship between resource demand and inflation as well as pricing power from global developments.
