The Minutes to the Federal Open Market Committee’s July meeting may draw more than the usual amount of attention this Wednesday for any clues on the Federal Reserve’s near term policy path, coming as they do just about midway between the FOMC’s July statement and the Federal Reserve Bank of Kansas City conference in Jackson Hole later this month.
The Committee discussions over the downside risks in China’s growth slowdown and just how close the Committee thinks it is to fulfilling the employment side of its mandate are due for particular scrutiny. But we think the persistence in low inflation and a likely debate over the balance of risks in the timing and pace to the long awaited policy normalization will also figure prominently in the Minutes.
So as prologue to Wednesday’s release, a few points follow on expected takeaways from the July meeting Minutes:
** China was already drawing Fed scrutiny for its impact on global growth and prices well before its recent regime change and devaluation, and it is likely to have received some attention in the staff presentations and during the economic go around in the first half of the July meeting. Any mention of China in the context of global disinflationary pressures would bear watching, but that said, we are not at all sure it will be highlighted for a specific concern beyond the need to be monitored in the later, more policy-sensitive discussions section of the Minutes.
** Closer to home, the Minutes are likely to show a Committee belief that the Fed is indeed getting close to the employment side of its mandate. The policy debate over the insertion of “some” in the statement reference to how much labor market improvement is still needed will likewise underscore the belief diminishing labor market slack is unlikely to reverse in the near term. And it is on this basis the FOMC is putting its “reasonable confidence” in the forecasts that beyond the “transitory” effects on prices, mandate-consistent inflation will also soon be within reach.
** The persistence of low inflation, however, is also likely to take up no small part of the policy discussions in the July meeting Minutes, which we suspect will show up in a debate over the balance of risks in the timing and pace to policy normalization. That debate is likely to have driven an FOMC near-consensus on the merits of a “sooner” rate hike, with the costs of potentially needing to raise rate rapidly in a “later” first rate hike outweighing the potential costs in a premature first rate hike. We still think, on balance, that more likely than not points to a September first rate hike (SGH 3/18/15, “Fed: September and a Shallow Path”).
** We doubt, however, there will be any overt signaling on a September likelihood to a first rate hike in the July meeting Minutes, or for any month for that matter (though it would be intriguing if the FOMC began a discussion to make October a live meeting). The premium at the time of the July meeting was — and to a very large extent it remains — on maximizing policy flexibility going into the remaining months of the year, and on steering market pricing away from Fed signaling to the data in the hopes of ensuring more two way trading and price discovery.
** That may prove to be more problematic than the Fed may hope, and a discussion over the market pricing and expectations for the Fed’s near policy path may figure in the account of the policy discussions in the Minutes. It could also show up in the discussion over the Open Market Desk’s operational readiness in lifting fed funds rate inside the target range, or where exactly inside that range the effective fed funds rate is most likely to settle.
** With the weight of some of the market still skeptical the Fed will ever move whatever the data, or still tending to seize on dovish reads of data while discounting hawkish takeaways, that desired price discovery is likely only to come after a first rate hike, not before. It feels to us a 50% pricing probability on the timing to a first rate hike is the same as an 80% probability in days of old. And while we are not at all certain if a shift in market psychology was discussed in the July meeting, it certainly will be before too terribly long.