No two ways about it, the Minutes to the July meeting of the Federal Open Market Committee this afternoon were on balance a tad “hawky.” By hawky we mean that the inclusion of the “significant under-utilization of labor resources” sentence seems to have been preceded by a fairly contentious debate. That was, in fact, our first impression in reaction to the statement (see SGH 7/30/14, “Fed: An Option Just Exercised”).
So while the Minutes certainly had “something for everyone” with some hawkish takeaways as we wrote earlier this week, the heart of the hawkish assault was not so much in the Exit sequencing or even that the inflation outlook was getting better (i.e. fading low inflation fears). Rather it was centered on deciding on just how should the statement adjust the language to acknowledge the gains to date by deleting the reference to the “elevated” headline unemployment rate but still acknowledge the Fed has a way to go before it can say it is near enough its mandate on unemployment to call it a day. Given the debate, you even have to wonder how the “significant” qualifier got in there about the “under-utilization” of labor resources.
But it did get in there. And for all the upbeat descriptions that surrounded the labor market slack debate, it would seem those FOMC members who see the need to press ahead with the current policy stance for a bit while longer “won” by the end of the meeting. The sentence, after all, is in, not out, just as the other dovish anchoring to the guidance in March about the longer run neutral rate being “below normal” got into the formal, voted statement.
September in July
To be honest, the tone of the debate in the Minutes over how to describe the degree of slack that remains in the labor markets was more of what we would have expected in the September meeting, not July.
That it did come a bit early, coupled to the dissent by Philadelphia’s Charles Plosser, unmistakably points to another contentious debate about what to do with the forward guidance on slack at the next meeting. As we have written earlier (SGH 7/24/14, “Fed: Calibrating the Guidance for Lift-off”), we suspect the debate this fall is not going to be about when to raise rates per se , but how to position the guidance beginning in September and perhaps running through October and the December meetings.
For the more hawkish minded who raised a ruckus in the July meeting, they want as much “insurance” (if that is the right word) as they can written into the guidance as they can get, with “upward” tweaks to remove some of the highly accommodative language in case it turns out the labor resources aren’t so under-utilized after all.
And for those who lean to the dovish side, it is a question of building as much optionality into the guidance as possible through the rest of this year, giving ground on some of the dovish guidance, but not so much so that the Committee is firing the flare gun that rate hikes are indeed six months or less away from lift-off.
Again, for all of the Committee, the signal shift on rates is likely to be as or more important than the first rate hike itself.
A “Balanced Dovishness” in Jackson Hole?
And finally, of course, this all begs the question over just how “dovish” Chair Yellen can now be in her highly anticipated speech Friday morning in Jackson Hole on “Labor Markets.” We do not think she will downplay any of the more upbeat assessments of the gains in the labor market that came across in the Minutes, as we still think she is very likely to acknowledge how much “substantial” improvement there has been over the last few years, and that the declines in unemployment have outpaced expectations.
But we likewise still expect the thrust of the speech will probably feel more dovish than not, in that she will be laying out the reasons a majority of the Committee see “significant” slack in the labor markets. There is obviously an awful lot of uncertainty in how exactly to read the data as it comes in, but the number of part time workers wanting full time work, the still elevated level of longer term unemployed, and the headline rate itself all still have quite a ways to go before there is likely to be the sort of wage growth the Fed will need to see baked into the forecasts for them to send the signal that the countdown to a rate lift-off has begun.
The trick for Chair Yellen, then, is going to be in finding the right balance — a “balanced dovishness” if you will — in striking a reasonably positive tone while at the same time clearly indicating we are not there yet. In some sense, the contentious nature of the debate reflected in the Minutes gives the Chair some cover to couch her case for the degree of slack that remains in the context of those gains to date.
That balance will be important to what we see as an evolution from July through Jackson Hole, to the crowded agenda of the September meeting and beyond, to a series of tweaks to the guidance right up through the December meeting: a slow but steady series of incremental steps towards the beginning of the end to the last six years of unconventional policies and the zero lower bound. That, on balance, barring yet another disappointment in the data, still points to a first rate hike by June or September of next year.