Since June's FOMC statement, bonds and bullion have been well bid with stocks unchanged as rate-hike hopes collapsed. For those looking to glean insight from a confused Fed's minutes today, we wish them luck. As WSJ notes, the minutes can prove to be dated and that will be especially so given that Brexit occurred just days after, so the best we could hope for from today's minutes was "what-ifs."
- *ALMOST ALL FED OFFICIALS SAW MAY PAYROLLS RAISING UNCERTAINTY
- *SOME OFFICIALS SAID LOWER PAYROLLS MAY SIGNAL BROADER SLOWDOWN
- *FOMC: PRUDENT TO WAIT FOR CONSEQUENCES OF U.K. VOTE
The key line however is the following:
Most judged that they would need to accumulate additional information on the labor market, production, and spending to help clarify how the economy was evolving in order to evaluate whether the stance of monetary policy should be adjusted.
In other words, nothing new as confusion continued, except for a Fed that is increasingly facing the realization that normalization is over as we draw readers' attention to the fact that the wordcount for 'uncertain' soared to 38.
Pre-Minutes: S&P Futs 2086, 10Y 1.385%, Gold $1367, BBDXY 1188.5
Further headlines:
- *MANY OFFICIALS SAID MAY PAYROLL REPORT UNDERSTATED JOB PACE
- *SOME FOMC MEMBERS ARGUED AGAINST DELAYING RATE HIKE TOO LONG
- *MOST OFFICIALS IN JUNE SAW HIKE WARRANTED IF GROWTH PICKED UP
- *FOMC: PRUDENT TO WAIT FOR CONSEQUENCES OF U.K. VOTE
As Bloomberg reports,
The minutes of their June 14-15 meeting show that the Federal Open Market Committee saw it prudent to wait for the result of Britain’s June 23 referendum, which at the time was still too close to call. The decision in favor of Brexit has since sent the pound tumbling and has driven bond yields to record lows.
The committee also weighed the health of the U.S. economy and the long-run trajectory for rate increases. A slowdown in hiring was among their chief concerns and another reason for caution. While “participants generally agreed that it was advisable to avoid overreacting to one or two labor-market reports,” the implications of recent employment data were viewed as “uncertain,” the minutes show. Most officials judged that they needed more information on jobs, production and spending.
“Most participants judged that, in the absence of significant economic or financial shocks, raising the target range for the federal funds rate would be appropriate if incoming information confirmed that economic growth had picked up,” job gains were sufficient to achieve full employment and inflation was moving up toward their 2 percent goal in the medium term, the minutes showed.
Confirming what we had noted previously (via WSJ),
The minutes can prove to be dated, even though they are now released 3 weeks after the latest gatherings. That will be especially so given what happened a week after the June meeting: Brexit. While uncertainty about how that vote would pan out helped keep central bankers on the rate-hike sidelines (though the jobs report 2 weeks earlier did most of that work for them), don't expect much insight beyond what ifs. And with Fed-fund futures putting 2016 on ice regarding a rate hike, the minutes likely won't change minds on that.
The Minutes showed the Fed's key concerns, namely about the economy:
While weakness in the drilling and mining sector was attributable to the earlier declines in oil prices, participants identified a variety of potential causes of the broader weakness in investment spending, including a slowdown in corporate profits, concern about prospects for economic growth, heightened uncertainty regarding the future course of domestic regulatory and fiscal policies, and a persistent reluctance on the part of firms to undertake new projects in the wake of the financial crisis. Some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown. A couple of participants also noted that elevated inventory levels could be a drag on economic growth in the near term. However, participants also cited factors that could lead to a pickup in business spending, including the recent turnaround in energy prices and the greater optimism on the part of firms indicated by surveys of businesses and anecdotal reports in some Districts.
The May jobs report:
The employment report for May showed considerably weaker growth in payrolls than had been expected, and gains in previous months were revised down. Although the unemployment rate fell in May, a drop in labor force participation accounted for the decline.
More on the May jobs report:
Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market. Even so, many remarked that they were reluctant to change their outlook materially based on one economic data release. Participants generally expected to see a resumption of monthly gains in payroll employment that would be sufficient to promote continued strengthening of the labor market. However, some noted that with labor market conditions at or near those consistent with maximum employment, it would be reasonable to anticipate that gains in payroll employment would soon moderate from the pace seen over the past few years.
... and the interpretation :
... many participants thought that the underlying pace had slowed some from that of previous months. Some noted that other indicators did not corroborate a material weakening of labor market conditions. These indicators included a number of regional surveys of labor market conditions, relatively low levels of initial claims for unemployment insurance, surveys of business hiring plans, and positive views of labor market conditions in recent consumer surveys. In addition, a few participants commented that the movements in labor force participation in recent months were, on balance, consistent with its secular downtrend. In contrast, some noted that the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity that was also evidenced by other downbeat labor market indicators, such as a decline in the diffusion indexes of industry payrolls, an increase in the number of workers reporting that they were working part time for economic reasons, or the recent sharp drop in labor force participation. Finally, a few participants suggested that the weak employment growth may instead reflect supply constraints associated with a general tightening of labor market conditions. These participants saw the rising trend in wages, business reports of reduced worker availability, and high rate of job openings as supporting this interpretation.Others thought it unlikely that such constraints would have become evident so abruptly.
Lack of Inflation:
Inflation continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Core PCE price inflation registered an increase of 1.6 percent for the 12 months ending in April, while recent readings on retail energy prices moved up notably. Most participants expected to see continued progress toward the Committee’s 2 percent inflation objective. They viewed the firming in some measures of core inflation, the evidence that wage growth was picking up, the ongoing tightening of resource utilization, the recent firming in oil prices, and the stabilization of the foreign exchange value of the dollar this year as factors likely to boost inflation over time. However, other participants were less confident that inflation would return to its target level over the medium term. They thought that progress could be very slow, particularly in light of the likelihood that tighter resource utilization may impart only modest upward pressure on prices. They also saw important downside risks, including persistent disinflationary pressures from very low inflation and weak economic growth abroad as well as the softening in some survey-based measures of longer-term inflation expectations and market-based measures of inflation compensation.
And of course, Brexit:
Most participants noted that the upcoming British referendum on membership in the European Union could generate financial market turbulence that could adversely affect domestic economic performance. Some also noted that continued uncertainty regarding the outlook for China’s foreign exchange policy and the relatively high levels of debt in China and some other EMEs represented appreciable risks to global financial stability and economic performance.
Under what conditions would the Fed raise:
Participants weighed a number of considerations in assessing the conditions under which it would be appropriate to increase the target range for the federal funds rate. Most participants indicated that they made only small changes to their forecasts for achieving and maintaining the Committee’s objectives of maximum employment and 2 percent inflation over the medium term. Several noted that the fundamentals underlying their forecasts remained solid, with several mentioning, in particular, that financial conditions were accommodative and household balance sheets had improved. In evaluating recent economic information, participants generally agreed that it was advisable to avoid overreacting to one or two labor market reports; however, the implications of the recent data on labor market conditions for the economic outlook were uncertain. Most judged that they would need to accumulate additional information on the labor market, production, and spending to help clarify how the economy was evolving in order to evaluate whether the stance of monetary policy should be adjusted. In addition, participants generally thought that it would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom on membership in the European Union in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook.
* * *
However, some other participants were uncertain whether economic conditions would soon warrant an increase in the target range for the federal funds rate. Several of them noted downside risks to the outlook for growth in economic activity and for further improvement in labor market conditions, including the possibility that the sharp slowdown in employment gains and the continued weakness in business fixed investment signaled a downshift in economic growth, as well as the potential for global economic or financial shocks. Moreover, several of them worried about the declines in measures of inflation compensation and in some surveybased measures of inflation expectations and suggested that monetary policy may need to remain accommodative for some time in order to move inflation closer to 2 percent on a sustained basis. A few pointed out that with inflation likely to remain low for some time and to rise only gradually, maintaining an accommodative stance of policy could extend the strengthening of the labor market. In addition, several participants observed that because short-term interest rates were still near zero, monetary policy could, if necessary, respond more effectively to surprisingly strong inflationary pressures in the future than to a weakening in the labor market and falling inflation.
But the one word that best summarizes the report is "uncertainty", used well over 30 times througout the text.
Since June's FOMC Statement...
