Following Jerome Powell’s testimony on Capitol Hill, the June Fed minutes will seem like an afterthought.
The Fed chair paved the way for a rate cut later this month, emphasizing uncertainty around the outlook and playing down June’s blockbuster jobs report. There was almost nothing in Powell’s prepared remarks or in the Q&A to suggest the Fed won’t pull the trigger at the July meeting.
Sure, we got the obligatory nods to the reasonably resilient US economy, but there was no sign whatsoever that the Fed chair went in with the intention of recalibrating market expectations which were still pricing a full 25bp cut even after Friday’s blowout payrolls print.
So, with a July cut (basically) in the books, and stocks having hit a fresh record high (with the S&P breaching 3,000 at one point), the Fed minutes are even more dated than usual.
That said, they’ll still be parsed relentlessly, as traders put on their tasseographer hats.
“Markets will look for any indication of the possibility of deeper and more front-loaded cuts amid a potential desire to avoid testing the effective lower bound, as well as any possible changes to the balance sheet run-off calendar to avoid sending contradictory signals to markets if the committee opts to act before September”, Barclays wrote Sunday. Remember, the new dots showed eight officials see lower rates in 2019, and seven of them see 50bp worth of cuts.
With that, the minutes look largely in line with expectations on a quick read. Notably, there’s a roundabout reference to reflexivity.
“While overall financial conditions remained supportive of growth, those conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks”, the minutes read. That’s pretty amusing and underscores the point that we (and plenty of others) have made recently with regard to the risk of a sudden FCI tightening in the event the committee disappoints market expectations at the July meeting. Recall this excerpt from “Why Cut?“, for instance:
When the market starts leaning hard into rate cut bets, it is dangerous for central banks to disappoint those expectations. That is most assuredly an example of the tail wagging the dog, but that doesn’t necessarily mean the dog is happy about the situation. That is, contrary to what you might be inclined to believe if you spent your time perusing conspiratorial blogs, the main argument for not disappointing lopsided market expectations if you’re a central banker is not that you want to inflate stock market bubbles. Rather, the argument for not blindsiding markets is that doing so risks triggering a messy unwind of crowded bets, a scenario which, depending on the setup, could tighten financial conditions (e.g., via a reversal of the “wealth effect” as stocks fall or through wider credit spreads). When financial conditions tighten significantly, it makes the case for easier monetary policy, which means disappointing initial market expectations could end up creating a scenario where what would have been preemptive easing turns into a reactive cut later. That isn’t desirable, as it suggests policymakers were behind the curve.
Here are some additional excerpts, which basically make the case for an insurance cut in light of ongoing uncertainty (note that only “a few” participants were worried about the risk of overheating the labor market and/or blowing bubbles, compared to the “many” who argued for cuts and expressed consternation about slowing growth and below-target inflation):
- Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective”
- “Many participants noted that they viewed the risks to their growth and inflation projections, such as those emanating from greater uncertainty about trade, as shifting notably over recent weeks and that risks were now weighted to the downside”
- “Many participants indicated that the case for somewhat more accommodative policy had strengthened”
- “Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook.”
- “Many participants noted that, since the Committee’s previous meeting, the economy appeared to have lost some momentum and pointed to a number of factors supporting that view including recent weak indicators for business confidence, business spending and manufacturing activity; trade developments; and signs of slowing global economic growth.”
- “Some participants suggested that although they now judged that the appropriate path of the federal funds rate would follow a flatter trajectory than they had previously assumed, there was not yet a strong case for a rate cut from current levels”
- “Many participants further noted that longer-term inflation expectations could be somewhat below levels consistent with the Committee’s 2 percent inflation objective, or that the continued weakness in inflation could prompt expectations to slip further.”
- “A few participants expressed the view that with the economy still in a favorable position in terms of the dual mandate, an easing of policy in an attempt to increase inflation a few tenths of a percentage point risked overheating the labor markets and fueling financial imbalances.”