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08 17 2016 | by Victor Xing | Central Banks

July FOMC minutes: data in focus as Brexit concerns fade

July FOMC minutes

The July FOMC minutes was less hawkish than expected.  Market sentiment going into the minutes release was cautious, and a number of market participants had expected easing Brexit concerns and a rebound in jobs data a harbinger of hawkish Fed communication.  However, section of the minutes focusing on policy normalization highlighted many policymakers’ willingness to wait for more data and assess economic conditions.

Additionally, most FOMC participants also saw relatively low risks of unwanted increase in inflationary pressures amid tighter labor market conditions, and there are signs that the risk management argument (asymmetrical risk with policy rate near effective lower bound) is gaining traction as well.

Markets initially bear flattened on the headline that “FED OFFICIALS SPLIT IN JULY ON WHETHER RATE HIKE NEEDED SOON,” but closer looks at the minutes quickly resulted in sharp reversals across asset classes – equities rose, front-end rates rallied back, the Treasury curve re-steepened, and dollar pared gains.

July FOMC minutes
5s30s re-steepened following the release of July FOMC minutes

July FOMC minutes in detail

Policy normalization

  • Many participants judged that it was appropriate to wait for additional information that would allow them to evaluate economic conditions
  • Several participants suggested that the Committee would likely have ample time to react if inflation rose more quickly than currently anticipated
  • Several participants expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to misallocation of capital and mispricing of risk
  • Some participants stressed that the Committee should consider the asymmetric risk with policy rate near the effective lower bound
  • Some other participants judged that another increase in the funds rate was or would be soon warranted
  • A couple participants advocated an increase at the July meeting
  • A few participants pointed out that various policy tools supported taking another step in removing policy accommodation
  • A few participants also warned on unwanted buildup of inflation pressure as a result of allowing labor market conditions to tighten further

Inflation and inflation expectations

  • Most participants noted that the firming in various indicators of core inflation over the past year provided support for their forecasts
  • Several participants noted recent indications of a pickup in wage increases were evidence of tightening utilization
  • Several other participants expressed greater uncertainty about the trajectory of inflation
  • Several participants viewed the risks to their inflation forecasts as weighted to the downside, particularly in light of the still-low level of measures of longer-run inflation expectations and inflation compensation, as well as dis-inflationary pressures from abroad

Labor market conditions

  • Most participants judged that labor market conditions were at or approaching those consistent with maximum employment
  • Most participants saw relatively low risk that a further gradual strengthening of the labor market would generate an unwanted increase in inflationary pressures
  • Several participants were concerned that Fed’s progress toward objective could be delayed if labor market slack diminish more slowly than anticipated
  • Some participants believed that a convergence to a more moderate, sustainable pace of job gains would soon be necessary to prevent an unwanted increase in inflationary pressures
  • Some participants indicated that a step-down in job gains seem appropriate and point to further increases in labor utilization
  • Other participants continue to judge that labor utilization remained below that consistent with the Committee’s maximum-employment objective, and progress in reducing slack in the labor market had slowed, citing relatively little change, on net, since the beginning of the year in the following areas
    • U3  unemployment rate
    • Involuntary part-time workers
    • Employment-to-population ratio
    • Labor force participation
    • JOLTS vacancy and quit rate
  • A few participants continued to caution about the risks to the inflation outlook from overshooting NAIRU

Domestic risk factors

  • Participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the June meeting
  • Participants judged that the incoming information, on the whole had lowered the downside risks to the near-term economic outlook
  • Most participants anticipated that economic growth would move ujp to a rate somewhat above its longer-run trend during the second half of 2016 and that the labor market would strengthen further
  • Several participants noted continued weakness in business investment posed some downside risks to their forecasts

Foreign risk factors

  • Most participants view the extended period of post-Brexit negotiations had the potential to increase uncertainties in the region
  • Several participants also saw the possibility of elevated market volatility from complications during the exit process
  • Some participants continue to see a number of downside risks, such as China’s FX policy and its run-up in debt to support economic growth

Financial conditions

  • U.S. financial conditions eased during the inter-meeting period
    • Major equity indexes rose
    • Longer-term interest rates fell
    • Credit spreads narrowed
    • Broad index of dollar valuation little changed

Financial stability

  • Several participants commented on potential overvaluation in the market for CRE, elevated level of equity values relative to expected earnings, and incentives for investors to reach for yield

Consumer spending

  • Participants highlighted that real PCE appeared to have risen over the first half of the year at a rate consistent with the positive trends in fundamental determinants of household spending
  • Participants cited a number of factors that had likely been supporting household spending
    • Solid real income growth
    • Gains in house and equity values
    • Low gasoline prices
    • Favorable levels of consumer confidence

Business conditions 

  • Many participants reported that business contacts anticipated that the U.K. referendum would have little effect on their businesses
  • Several participants indicated that manufacturing was still quite weak
  • Several participants reported that their Banks’ June surveys showed that manufacturing activity had picked up or stabilized
  • Several participants noted that recent firming in crude oil prices had led to a modest increase in driling activity

Business fixed investment

  • Participants assessed that business fixed investment appeared to have declined further during the second quarter, with broad-based weakness in equipment and another steep drop in drilling and mining structures
  • Participants noted that the recent rise in energy prices had spurred an uptick in drilling activity, suggesting higher energy prices would diminish drags in the sector
  • Participants pointed out the uptrend in investment in intellectual property products were a positive in the outlook for investment
  • Participants discussed a number of factors that may have been contributing to businesses’ cautious approach to investment spending
    • Concerns about the likelihood of an extended period of slow economic growth
    • Narrowing profit margins
    • Uncertainty about prospects for government policies
  • Several participants commented on favorable reports on commercial construction


  • Participants commented on a number of factors suggesting that the housing sector was likely to continue to improve, albeit gradually
    • Rising sales of existing homes
    • Signs of stronger demand for residential mortgage loans
    • Steady increase in house prices
  • Several participants noted positive reports on residential construction activity from business contacts

Next article08 16 2016 | by Victor Xing | Economics

July CPI: softer energy offset firmer medical care prices