FOMC minutes: Divergent views on the outlook kept Fed in limbo

The minutes of the 15-16 June FOMC meeting confirmed the divergence that we saw in the FOMC projections and the strange disconnect between the relatively upbeat FOMC statement and Chair Yellen’s following more cautious tone at the press conference in June (see FOMC meeting: Inner circle of FOMC tilts towards one hike this year).

On the labour market, the recent improvement in both job growth and wage inflation was acknowledged, but the implications for monetary policy were less clear: “most participants judged that further progress would be required to eliminate underutilization of labor resources; some of them anticipated that the utilization gap would close around the end of the year. Several other participants indicated that, in their view, labor market slack had already been largely eliminated”. These comments are in line with the Fed funds rate projections which showed a majority in favour of two hikes this year, but with the most influential FOMC members likely among the members projecting only one hike this year. The conclusion, as we know, was that Most agreed that they would need more information on developments in the labor market to establish a solid basis for assessing whether labor market conditions had improved sufficiently to initiate tightening. Which leaves us with the meeting-bymeeting assessment of policy and the data dependence mantra.

The weakness in Q1 GDP growth was discussed, in particular the sluggish consumption growth. Some worried that there had been a permanent shock to consumers’ preferred savings rate. Other worries were Greece, China and whether the apparent weakness in productivity growth recently would be reversed or continue, which has significant implications for future job growth.

In relation to Greece, the main worry seems to be risks to financial markets in the euro area and possible spill-over to the US. Given the so far relatively modest reaction in financial markets to Greece, we think that the Fed’s worries as laid out by NY Fed President Dudley last Friday (see Flash Comment: Greece - implications for Fed) are likely to have eased since then. Note the speech by San Francisco Fed President Williams today, in which he stated that while a worst-case scenario of a Greek exit from the euro leading to sizable financial and economic impacts on the global economy cannot be ruled out, it remains an unlikely tail risk.

The minutes also touched upon the more technical issues relating to the first rate hike. At the meeting where the first rate hike is decided, the FOMC will in addition to the ordinary FOMC statement release a second more technical paper. This will explain how the Fed will reach the announced target rate and how various official rates will be adjusted in accordance.