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Preview: What to look for in the FOMC Minutes - BAML
Bank of America Merrill Lynch on the FOMC Minutes:
The minutes of the 27 July FOMC meeting will be of particular interest (Wed, Aug 17). The minutes have increasingly become a policy tool, at times sending a different message than the statement. In this case, we think the minutes will sound slightly more hawkish than how market participants interpreted the statement.
We will be particularly interested in the conversation about risks to the outlook. In the statement, FOMC officials noted that "near-term risks to the economic outlook have diminished", which we believe reflects the strong June jobs report and improvement in global financial conditions. We will be curious to see how much comfort Fed officials have by the tame reaction in the markets post-Brexit. While there will be a general sense of relief, we suspect that a number of Fed officials will still note that they want more time to make sure financial conditions remain favorable. This in part reflects the fact that the non-voters lean a bit more hawkish and their voice is heard in the minutes, but not the statement.
We also expect the minutes to reveal a debate about the degree of slack in the labor market. The statement noted that labor utilization has increased in recent months, suggesting that a number of Fed officials have become encouraged by the higher trend in the labor force participation rate (LFPR). This suggests that a portion of Fed officials believe there is a bit more slack in the labor market and therefore greater capacity for job growth. This is another reason for the Fed to be patient with rate hikes. There may be a discussion about the recent widening in LIBOR spreads. It is largely understood that the increase in spreads is related to upcoming money market mutual reform rather than a function of the Fed's monetary policy. We therefore think Fed officials will consider the move in LIBOR spreads to be largely an expected impact from the reforms and not a sign of material market stress. Nonetheless, it does imply an increase in borrowing costs for some, which the Fed cannot ignore.
Overall, we think the minutes will sound slightly more hawkish than the statement as Fed officials emphasize that downside risks have abated and that the US data have generally been supportive of continued growth in the economy. But the minutes are unlikely to imply an imminent hike.
Risk Of Adjustment In Fed Expectations Next Week
Our attention next week will be on the release of the minutes from the Federal Reserve’s FOMC meeting on 26-27 July.
Our economists point out that this year the minutes have often been interpreted differently from the post-meeting statement. While the market had a relatively muted reaction to the July statement, we think the minutes could guide the market to price in a greater chance of a September rate hike. We continue to think this should be priced closer to 60-65% than the current 20% implied by rates markets.
Fed communication next week will also be crucial, with speeches by Lockhart (16 Aug), Bullard (17 Aug) and Williams (18 Aug). If our view is correct that the Fed will hike in September, rhetoric from speakers will need to turn more hawkish.
UBS on the FOMC minutes - preparing for a December rate hike?
The minutes of the July meeting of the Federal Open Market Committee (FOMC) will be released on Wednesday 2pm (US time)
Don't expect 'material surprises' in Wednesday's FOMC Minutes - RBS
RBS with an FOMC Minutes preview:
In our view, the tone of the policy debate won't change all that much after the release of the FOMC minutes from the July 26-27 meeting. Consistent with the Fed statement, we do not expect the minutes to contain material surprises. However, the minutes could flesh out some details on officials' decision to reintroduce language around risks. The July FOMC statement noted "near-term risks to the economic outlook have diminished." At the margin, we believe this marks a small step in the sequencing of language used ahead of a rate hike. In our opinion, discussion here would probably be one of the most interesting aspects of the minutes.
Something else to keep track of will be any discussion on lower potential growth and the neutral Fed funds rate. In a recent interview, Fed Governor Powell offered some sympathy to the secular stagnation view-adding to the growing list of FOMC members who have cited this as a reason to be cautious about the timing and path of rate hikes. Mr. Powell said, "The median estimate on the committee is 3% for the long-term federal funds rate. It could be lower than that, in my view." The minutes from the June FOMC meeting briefly added a new wrinkle to the discussion on the neutral rate, citing factors such as slow productivity and demographic trends as reasons for participants lowering their long-run estimates. In prior FOMC communications, officials generally attributed lingering "headwinds" from the recession that could restrain growth and lower the neutral rate. We suspect a fair amount of time was dedicated to this topic at the July meeting and any added color here is likely to be interpreted as dovish.
Meanwhile, the July FOMC communiqué upgraded its current economic assessment, noting both the strengthening in the labor market and a moderate expansion in overall economic activity. With respect to payrolls, the FOMC explicitly acknowledged the rebound in job growth saying, "Job gains were strong in June following weak growth in May." The statement also mentioned "payrolls and other labor market indicators point to some increase in labor utilization in recent months", a subtle shift relative to January when the last time officials referenced "some additional decline in underutilization of labor resources" [emphasis added]. The alteration likely reflects officials probably believe they are close to or at full employment. (Note: As of June, the FOMC longer run median unemployment rate projection was 4.8%.) In addition, household spending was said to be "expanding strongly" (an upgrade). That positive sentiment on jobs and spending could well find its way into the minutes too. In the end, we may learn more about near-term policy from Chair Yellen's Jackson Hole speech on Friday, August 26 - and, of course, from the key economic data to be released in the first week of September
July FOMC Minutes: Expected USD Reaction
Despite the strong July employment report the USD struggled this week. Headline payroll growth was strong, but with the unemployment rate steady, wages stable, and the labor force participation rate ticking up, the report does little to force the Fed’s hand and leaves them comfortably on hold for now. The resulting low vol, positive carry environment precipitated a further reduction in USD positioning as 2016 Fed expectations were little changed. For the USD to rally further, we need to see a more consistent trend of upside surprises that convinces the market Fed normalization will continue beyond just one hike. In other words, we need to see a more significant repricing of 2017 and 2018 expectations.
This week’s FOMC Minutes could have some impact on market pricing. We expect the Minutes to offer a bit more optimistic assessment of the US economy and global financial conditions, similar to the July statement.
The knee-jerk reaction could see the USD strengthen as this will be viewed on the hawkish side given the USD selloff we have seen since the NFP report. But, a failure by the Fed to signal hikes are imminent and/or a more protracted normalization cycle means the FX market impact is likely to be short-lived.
source
Expectations for the US Fed FOMC Minutes out tonight at 18.00 GMT 17 Aug
The report comes courtesy of MNI.
Here's what a few banks are looking for:
outlook have diminished" and see members take on it in context of mon policy
statement in Sep, which would put bank on track to hike in Dec or too much risk
downside risks have abated.
to "home-in" on discussion on balance of risks which we see tilted to downside.
more balanced or even favorable rather than having "diminished" and therefore
further insight into likelihood of Sep rate hike.
Expect Hawkish Tilt To July FOMC Minutes - BNPP
The FOMC will release the minutes from its July meeting on Wednesday, and we expect them to be hawkish compared to June’s minutes released on July 6. At the time of writing, fed funds futures prices implied a 24% probability of a hike in September, and a 51% probability of a hike by December.
We expect a more upbeat labor market discussion, relief that Brexit risks had diminished, and more confidence that domestic demand had strengthened. The most notable change in July’s statement was the Committee’s assessment that “near-term risks to the economic outlook” had diminished. The Brexit vote won, but did not unleash a major financial shock. In fact, it eased US financial conditions.
We expect participants to sound cautiously optimistic on this front. The discussion of the labor market will likely sound more upbeat compared to June, when the Committee said that “the pace of improvement in the labor market has slowed” and job gains have “diminished.” In its July policy statement, the FOMC saw labor market indicators as pointing to some increase in labor utilization and described job gains as “strong”.
The communication should help keep the option of a September hike open for the Fed.
source
Fed's Fischer: "We are close to our targets"
Federal Reserve Vice Chairman Stanley Fischer in a speech in Colorado
A RoadMap Of Our Expectations For Next Week's FOMC
While the FOMC is unlikely to deliver a rate hike, the committee will have to communicate that a hike is still likely before the end of the year. This means that the communication will have to sound cautiously hawkish, which is not an easy task. Here is a roadmap of our expectations:
Statement communication: risks are now balanced
The most important change to the statement will be the description of the balance of risks. In the July statement, the FOMC noted that"near-term risks to the economic outlook have diminished" ….but they continue to monitor inflation indicators and global economic/financial developments. We expect this to be changed to sound more upbeat. The Fed could possibly follow the playbook from last year, noting that the "risks to the outlook for economic activity and the labor market are nearly balanced", while stating that they will continue to monitor these risks (particularly global economic/financial developments and inflation indicators). This would be a natural evolution for the Fed - risks were skewed to the downside in the spring, they were diminished by late summer and are currently balanced.
In addition to changing the balance of risks statement, we think the language will generally sound upbeat about real activity. Despite the slowing in job growth in August, we think the FOMC will note that the labor market continues to strengthen, reinforcing that the Fed follows the trend in job growth rather than a single report. We also suspect that the FOMC will maintain the language that economic activity has been expanding at a moderate pace. We do not expect any significant changes to the inflation language given that the data have largely been as expected and inflation expectations have remained range-bound.
Economic projections: introducing 2019
As well as introducing forecasts for 2019, the Fed will have an opportunity to refresh assumptions for 2016-18. Given weak growth in the first half of the year, we think there is a risk that the median forecast for GDP this year is revised lower to 1.9%, which is consistent with our forecast (Table 1). We think the Fed will otherwise leave forecasts at 2.0% for the remainder of the forecast horizon. The unemployment rate remains sticky as the labor force participation rate (LFPR) has surprised to the upside relative to expectations. We therefore think it is possible that some Fed officials plug in more optimistic forecasts for the LFPR, resulting in an upward revision to the unemployment rate to 4.8% in 4Q this year from 4.7% previously. We do not expect changes to either headline or core PCE inflation.
The crystal ball gets foggy as we look toward 2019, which will likely leave Federal Reserve officials to plug in forecasts close to the long-run assumptions. We expect the median forecast for GDP to be 2.0% and we expect the median for both headline and core PCE inflation to settle at the 2.0% target. It will be interesting to look at the range of forecasts - it is possible that a few members pencil in above 2.0% inflation for 2019, implying that they anticipate overshooting the inflation target due to accommodative policy. We think the median forecast for the unemployment rate will be 4.5% or slightly below in 2019, reflecting the view that NAIRU is lower and that the Fed would like to see further tightening in the labor market.
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Roadmap of expectations for this week's FOMC announcement
Bank of America / Merrill Lynch on the Federal Reserve's Federal Open Market Committee meeting on Wednesday this week
While the FOMC is unlikely to deliver a rate hike, the committee will have to communicate that a hike is still likely before the end of the year. This means that the communication will have to sound cautiously hawkish, which is not an easy task. Here is a roadmap of our expectations:
Statement communication: risks are now balanced
The most important change to the statement will be the description of the balance of risks. In the July statement, the FOMC noted that"near-term risks to the economic outlook have diminished" ....but they continue to monitor inflation indicators and global economic/financial developments. We expect this to be changed to sound more upbeat. The Fed could possibly follow the playbook from last year, noting that the "risks to the outlook for economic activity and the labor market are nearly balanced", while stating that they will continue to monitor these risks (particularly global economic/financial developments and inflation indicators). This would be a natural evolution for the Fed - risks were skewed to the downside in the spring, they were diminished by late summer and are currently balanced.
In addition to changing the balance of risks statement, we think the language will generally sound upbeat about real activity. Despite the slowing in job growth in August, we think the FOMC will note that the labor market continues to strengthen, reinforcing that the Fed follows the trend in job growth rather than a single report. We also suspect that the FOMC will maintain the language that economic activity has been expanding at a moderate pace. We do not expect any significant changes to the inflation language given that the data have largely been as expected and inflation expectations have remained range-bound.
Economic projections: introducing 2019
As well as introducing forecasts for 2019, the Fed will have an opportunity to refresh assumptions for 2016-18. Given weak growth in the first half of the year, we think there is a risk that the median forecast for GDP this year is revised lower to 1.9%, which is consistent with our forecast (Table 1). We think the Fed will otherwise leave forecasts at 2.0% for the remainder of the forecast horizon. The unemployment rate remains sticky as the labor force participation rate (LFPR) has surprised to the upside relative to expectations. We therefore think it is possible that some Fed officials plug in more optimistic forecasts for the LFPR, resulting in an upward revision to the unemployment rate to 4.8% in 4Q this year from 4.7% previously. We do not expect changes to either headline or core PCE inflation.
The crystal ball gets foggy as we look toward 2019, which will likely leave Federal Reserve officials to plug in forecasts close to the long-run assumptions. We expect the median forecast for GDP to be 2.0% and we expect the median for both headline and core PCE inflation to settle at the 2.0% target. It will be interesting to look at the range of forecasts - it is possible that a few members pencil in above 2.0% inflation for 2019, implying that they anticipate overshooting the inflation target due to accommodative policy. We think the median forecast for the unemployment rate will be 4.5% or slightly below in 2019, reflecting the view that NAIRU is lower and that the Fed would like to see further tightening in the labor market.
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