July Fed Minutes: Highlights And Summary

Ok, well if you needed an interesting setup for the Fed minutes, you got one.

The backlash from Trump’s Tuesday afternoon meltdown in New York effectively forced the President to dissolve his Manufacturing Council and Strategy & Policy Forum as CEO after CEO defected in protest.

That put pressure on stocks and the dollar while gold spiked with the VIX.

As a reminder from our week ahead preview (always out Sunday evenings at ~7-ish if you want to tune in), here’s what you’re looking for from the minutes, via BofAML:

For the Fed, focus is on the inflation outlook and discussion of transitory vs persistent factors. Our US economists think the minutes will show general agreement about the roadmap for balance sheet normalization. Furthermore, a discussion over the neutral rate could be on the table, given the recent Fed talk.

And here are some quick bullet points from Citi:

We will be looking for three items in the minutes from the July FOMC meeting:

• Inflation — We expect slightly less confidence that the recent slowing is “transitory” but for medium-term expectations for a return to two percent to remain in place. Increased emphasis on the low unemployment rate is not our base-case, but could create a hawkish surprise.
• Balance sheet reduction — Any indication regarding what — if anything — can postpone the September announcement could be the most interesting marginal information.
• Financial conditions — Participant comments indicate there is no desire to actively push back against rich risk-asset prices.

As Citi also notes, “while interesting, the inflation discussion is stale following last week’s CPI release and this makes risks around the minutes both muted and fairly balanced.”

Well, “muted and fairly balanced” until Donald Trump. You can’t forget to control for the data point that he’s President.

In any event, it’s the whole inflation versus the labor market (“who you gonna believe”?) dynamic, but as noted above, all eyes are on September for the normalization push. And although the commentary is by definition out of date, this discussion takes on added significance given the events that conspired to push risk assets lower and vol. higher last week.

Ok, so without further ado, here are the high (or low, depending on how you want to look at it) points via Bloomberg:

• “Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.“
• “Most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee’s 2 percent objective over the medium term.”
• • “Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.”
  • “Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors.”
  • “Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored.”
  • “A few participants cited evidence suggesting that this framework was not particularly useful in forecasting inflation. However, most participants thought that the framework remained valid, notwithstanding the recent absence of a pickup in inflation in the face of a tightening labor market and real GDP growth in excess of their estimates of its potential rate.”
  • “Some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization had tightened, and noted their increased uncertainty about the outlook for inflation.”
  • “A few participants expressed concerns about the possibility of substantially overshooting full employment, with one citing past difficulties in achieving a soft landing.”
• “Participants also considered equity valuations in their discussion of financial stability. A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations; in addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability.”
• “A couple of participants expressed concern that smaller banks could be assuming significant risks in efforts to expand their CRE lending.”
• “Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in policy accommodation.”
• “Several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans.”
• “It was also observed that the budgets of some state and local governments were under strain, limiting growth in their expenditures. In contrast, the prospects for U.S. exports had been boosted by a brighter international economic outlook.”