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FOMC Minutes July Preview: More new questions than answers

Ø  US economic situation may be changing rapidly, and could obviate the information in the minutes.

Ø  Consumer Sentiment in August dropped to an 11 year low, worst of pandemic.

Ø  Retail sales fell 1.1% in July, more than triple the expected drop of 0.3%.

Ø  July 27-28 FOMC statement said economic progress had been made.

 

At the July 27-28 Federal Reserve meeting, the policy question seemed straightforward. Was the US economy, particularly the labor market, improving enough to begin the taper discussion? 

The following sentence had been added to the Federal Open Market Committee (FOMC) statement. " Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”

It appeared to be an acknowledgement of US economic progress and perhaps the necessary first step on the path to a reduction of the $120 billion monthly bond program. Markets, however, were wary. The dollar and Treasury yields rose modestly and equities cut some of their losses at the release. The caution turned out to be well justified.

 

By the time Fed Chair Jerome Powell had finished his news conference, any assumption that the initial taper discussion was near had vanished. The US economy might have improved but, according to Mr Powell, it was still far from the “substantial further progress” of the Fed’s guideline for a change in policy.

Markets reversed, the small dollar and Treasury yield gains turned into losses and equities finished lower. 

 

FOMC minutes

The minutes are an integral component of Fed communication and will almost always elaborate on points raised by the statement or Chair Powell, but rarely present new information. 

Markets will be seeking clarification of the progress that the economy has made to the Fed’s goals and sense of how many governors were in favor of a quicker lift-off in rates. 

 

Conclusion

The pertinence of the FOMC minutes have been superseded by the Michigan sentiment number and the sharp dip in consumer spending.

Even If the governors had discussed ending the bond program in the fourth quarter of this year or the first quarter of next, that was before Retail Sales declined in July and  sentiment plunged off a cliff in August. 

The rise of Covid-19 cases in the time since the July FOMC meeting and the continuing high inflation are the likely culprits behind the plunge in Consumer Sentiment and spending.

Whether the plummet in consumer outlook is a temporary reaction to the pandemic and inflation, or the beginning of a period of weakening consumption is unknown, but until the Fed has an answer, changes in rate policy are on hold.

About 70% of US economic activity is tied to consumer spending.  If domestic consumption falls while inflation remains high, it creates a painful dilemma for the Fed.

Raise interest rates to quell inflation at the cost of growth and job creation or remain accommodative and exacerbate inflation but support GDP and hiring.

If the Fed has to choose between inflation and job creation, it will choose the latter every time.

 

Reference: FXStreet