Getting Ready for July FOMC Minutes

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This is the week for the Fed, with two major events that have the markets on tenterhooks. Later we have the release of the minutes from the last meeting. These will give us some valuable insight into what to expect from the FOMC going forward. Everyone is especially interested to see what the chances of another cut are.

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Although this is an important data point for central bank trackers, it might be somewhat overshadowed by expectations regarding what we might get from the annual Jackson Hole symposium going into the weekend. Analysts will be combing through the minutes to get some clues into what Chairman Powell might say. Not only this but also to get a better understanding of the split vote about cutting rates at the last meeting.

The Changing Situation

There was an important economic development after the last meeting, which puts a new context on our understanding of the Fed’s outlook. The official inversion of the bond yield curve brings up the question of what tools the Fed has to deal with a potential recession. Currently, rates are half what they were in the leadup to the financial crisis. The bank has just barely finished its balance sheet normalization.

In fact, some are questioning whether the balance sheet has actually been fully adjusted. Or whether it’s at the appropriate level. One of the arguments that the Fed had during its latest tightening cycle is to build the policy room to deal with future economic downturns. Some analysts argue that the process is far from complete. And that the latest cut was an interruption that has left the Fed with a half-empty tool bag.

What to Expect

It will be interesting to see how unified the FOMC is in terms of policy outlook. After the meeting, Powell said that the cut was a “mid-cycle adjustment”. This suggests that there is more tightening on the cards. More importantly, that easing wasn’t something being considered.

How many board members agree with that view? Well, the two dissenting members at the last meeting had an upbeat outlook for the economy. Rosengren, in particular, commented that the economy’s growth was “satisfactory”.

We’ll be keen to see if there has been any talk about what conditions the committee saw as appropriate to start easing.

The Cut and Going Forward

The US economy is largely seen as out of pace with the rest of the world. This is despite the bleak global outlook being blamed on the trade war initiated by the US. In terms of employment, GDP, and inflation, the US continues to post positive numbers. This is in spite of the repeated press commentary about an impending recession.

While the yield curve inversion carries a lot of weight among analysts, it is not an accepted tool for the Fed. In fact, even by the track record of the indicator, we’d still be a full year ahead of a potential recession. In this context, the Fed’s rate cut can be understood as an insurance adjuster. This is because of the moves in other major central banks around the world.

The Bottom Line

The markets would like at least speculation of a cut to boost volatility, and to inject liquidity. This hopeful thinking might get the market ahead of itself, with expectations of finding comments among the minutes to justify more easing in the future. But the Fed’s minutes are likely to be mundane. It’s likely that they will not reveal much beyond what external factors might affect the domestic economy, which is broadly seen to be doing well.

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