The meeting minutes from the June 14/15 FOMC policy meeting showed a cautious approach in the Fed’s outlook on the US rate hike decision.
Policy makers said that US interest rate hikes should be put on hold until a clearer picture emerged on the outcome of the Brexit verdict. The meeting which took place ahead of the UK referendum vote made many policy makers uneasy. The minutes said, “Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote,” in reference to the risks of the Brexit vote.
Summary of the Fed’s meeting minutes
- Most participants expected Brexit vote could generate turbulence that might hurt U.S. economy; almost all saw “surprisingly weak” May employment report boosting uncertainty
- Many were reluctant to change their outlook “materially” based on 1 data release; participants expected to see resumption of monthly gains in payrolls sufficient enough to promote strengthening of labor market
- Some said that with labor market at or near level consistent with full employment, reasonable to expect any gains to moderate soon from pace seen in past few years
On the domestic front, policy makers were divided on the outlook for jobs, but broadly agreed that a single jobs report would not be changing their views on the US labor markets. Some policy makers cited a slowdown in hiring by US employers and saw this as a reason to leave rates unchanged. Prior to the Brexit vote, the Federal Reserve signaled two rate hikes this year to keep the economy from overheating. However, following the surprising Brexit outcome, policymakers took a more cautious approach going forward.
US equity markets held steady after the meeting minutes, with the Dow Jones Industrial Average closing in the posting, gaining 78 points. The S&P500 Index also closed with decent gains of 0.54% while the NASDAQ gained 0.75%. This came after initially, the markets opened deep in the red as strong risk aversion set in.
ISM services index rises to a 7-month high
Ahead of the Fed meeting minutes, the Institute of Supply Management’s non-manufacturing or services index showed that the services sector expanded in June at the fastest pace in seven months.
The ISM’s non-manufacturing index survey report showed an increase to 56.5, from 52.9 in May broadly beating the median forecasts of 53.30. Business activity index jumped from 55.1 in May to 59.5 in June, beating expectations of 55.50. The employment index in the services sector also gained, rising to 52.7 from 49.7 previously. The ISM’s manufacturing index released earlier showed an increase in the pace of growth in the manufacturing sector as well.
Looking ahead
- US ADP private payrolls report is expected to be released later today. Median forecasts point to an average of 160k jobs being added to the private sector
- Weekly unemployment claims will be released simultaneously as well, and the report is expected to show 266k for the week ending July 2nd
- On Friday, the much-anticipated jobs report for June will be released. Expectations call for the US unemployment rate to rise to 4.80% in June, while the number of jobs added to the economy is forecast to show 175k jobs on the month. Average earnings are forecast to remain unchanged at 0.20% on a month over month basis.
