Thursday, July 7, 2016

Fed Meeting Minutes - June

Here are the minutes from the last Fed meeting.  The big news was it appears there will be no rate hike for awhile at least. Participants certainly don't see any chance as the probability for a July hike dropped to near zero after reading about a 5-10% chance most the last few weeks. That may be true, but it seems they have been leaving the door open for a rate hike whenever they see fit. Notice the language in the following paragraphs. I've highlighted a few sentences for emphasis.

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, that job gains were continuing at a pace sufficient to sustain progress toward the Committee's maximum-employment objective, and that inflation was likely to rise to 2 percent over the medium term. Some participants viewed a broad range of labor market indicators as well as the recent firming in wages as consistent with a high level of labor utilization. They also pointed out that core inflation had begun to move up and that the transitory factors that had been holding down headline inflation were receding. Several of these participants expressed concern that a delay in resuming further gradual increases in the federal funds rate would increase the risks to financial stability or would raise the potential for overshooting the Committee's objectives; such an overshooting might require a rapid removal of policy accommodation at some point in the future, which could entail significant risks for U.S. financial markets and the economy.

And then this paragraph

With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Most members made only small changes to their forecasts for economic activity and the labor market. Most judged it appropriate to avoid overweighting one or two labor market reports in their consideration of the economic outlook, but they indicated that the recent slowing in payroll employment gains had increased their uncertainty about the likely pace of improvements in the labor market going forward. Many noted that the slowdown could be a temporary aberration and that other labor market indicators--such as new claims for unemployment insurance, the rate of job openings, and readings on consumers' perceptions of the labor market--remained positive. Some of them judged that labor market conditions were now at or close to the Committee's objectives and pointed out that some moderation in employment gains was to be expected when such conditions were near those consistent with maximum employment. However, other members observed that the recent soft readings on payroll jobs as well as the decline in the labor force participation rate and the absence of further reductions in the number of individuals who were working part time for economic reasons in recent months suggested a possible downshift in the pace of improvement in the labor market.

Clearly at least a handful of members think it's time to raise rates. The cries will only get louder. Especially since we just got a big ISM Services reading at 56.5. 

My take is the Fed is awfully close to a rate hike this year. Additionally if you review their "Dot Plot" you'll notice the majority of members see rates rising to 0.75% this year. So maybe not July, but September seems like an awfully good candidate. That in my opinion would be their last chance to raise rates if they want to avoid being seen as trying to influence the upcoming elections. The market seems to think they'll raise rates in December which would be after the elections. That's a plausible scenario too. Although there is a lot of summer left to see how the markets continue their reaction to Brexit and other developments. 

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