I’m not sure how much markets are going to care about the Fed minutes given how much hawkish rhetoric we’ve gotten since the June hike and given the fact that it is now abundantly clear that the committee is pursuing a bubble-busting “third mandate” aimed at curbing risk taking by leaning against loose financial conditions (lackluster inflation be damned), but I suppose if you parse them to death, you can find something to trade on.
Below, you can find a list of 4 things Citi is looking for – basically it’s the same list anyone who hasn’t been asleep for six months is looking at…
Minutes from the June meeting are unlikely to hold a hawkish surprise relative to confidence Fed officials have expressed in hiking despite slowing inflation.
We will look to the minutes for the FOMC’s answers to four question:
- How much must inflation accelerate to keep the Fed hiking?
- Do tight labor markets create near-term pressure to hike?
- Are easy financial conditions a rising concern?
- When will balance sheet reduction be announced and will the announcement imply a “pause” in rate hikes?
That bolded question is probably the most important as the answer to it holds the key to answering the other questions.
In any event, here are the highlights from the just released minutes for you to take to your local palm reader…
- “Participants expressed a range of views about the appropriate timing of a change in reinvestment policy. Several preferred to announce a start to the process within a couple of months; in support of this approach, it was noted that the Committee’s communications had helped prepare the public for such a step. However, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”
- “A few of these participants also suggested that a near-term change to reinvestment policy could be misinterpreted as signifying that the Committee had shifted toward a less gradual approach to overall policy normalization.”
- “Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run.”
- “Several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”
- “A couple of participants expressed concern that a substantial undershooting of the longer-run normal rate of unemployment could pose an appreciable upside risk to inflation or give rise to macroeconomic or financial imbalances that eventually could lead to a significant economic downturn.”
- “Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn.”
- “They also noted that, according to some measures, financial conditions had eased even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy.”
- “Corporate earnings growth had been robust; nevertheless, in the assessment of a few participants, equity prices were high when judged against standard valuation measures.”
- “Some participants suggested that increased risk tolerance among investors might be contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.“
- “The effect on financial market conditions of the eventual announcement of the beginning of the Federal Reserve’s balance sheet normalization was expected to be limited.”