Stale Fed Minutes Show Consensus Around ‘Mid-Cycle Adjustment’ Narrative Prior To Market Turmoil

Ahead of Jerome Powell’s remarks in Jackson Hole, the market gets to digest the July Fed minutes.

These are obviously stale considering the meeting occurred prior to the latest trade escalation, market volatility and also before the 2s10s inversion.

Still, the potential exists for the minutes to rattle investors if they betray a sharply divided committee or indicate there was broad consensus around the idea that a full-on easing cycle isn’t necessary. Sure enough, the account of the meeting shows most officials viewed the July cut as a “mid-cycle adjustment”.

Stocks were up sharply into the minutes on Wednesday, but snapped a three-session win streak the previous session amid the usual jitters on growth, trade and generalized uncertainty about the outlook.

The minutes show “a number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook”.

The day after the decision, Trump rekindled the trade war in an apparent bid to compel more rate cuts.

Notably, “a couple of participants indicated that they would have preferred a 50 basis point cut” although “several favored maintaining [policy], judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment”. Eric Rosengren and Esther George of course dissented at the meeting.

The July minutes also show officials don’t think the trade war is likely to abate. “Participants judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook”, the account reads.

On the yield curve, “a few participants expressed the concern that… the 10-year yield falling below the 3-month yield had persisted for about two months, which could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response”.

Just two weeks later, the 2s10s inverted.

“The FOMC minutes, although not taking into account events in August, provide insights into the Fed’s view on ‘mid-cycle adjustment’ and balance of opinions within the committee, given two dissenting votes at the July meeting”, Barclays wrote over the weekend.

It sounds as though most officials were on the same page with regard to the “adjustment” characterization of the July cut at the time, although it’s likely that the more dovish members view things at least a little bit differently now.

Markets appear poised to take it all in stride ahead of Powell’s remarks on Friday.

The dollar hit a new high for the year on Tuesday following comments from Rosengren, who clearly indicated that he’d be inclined to dissent again in September absent evidence to support the need for rate cuts.

Donald Trump has dedicated tweet after shrill tweet to Jerome Powell and Fed policy this week.

Among other things, the president accused Powell of betraying the country’s economy with “a horrendous lack of vision” and (perhaps unintentionally) suggested the US should cut rates below zero.

Full minutes