5 Highlights from the June FOMC Minutes

The minutes for the June FOMC meeting didn’t spark a lot of fireworks since the June meeting was held before the vote in favor of a Brexit. But if you’re interested on what Fed officials were deliberating about, then here are the 5 highlights that you need to know about.

1. Business investment remains subdued

Fed officials noted that weak business investment persisted even during Q2 2016, which does not bode well for the long-term prospects of the U.S. economy. Fed officials couldn’t pinpoint the reason why business investment remains soft, however, although several potential causes were brought up, and these include:

  • slowdown in corporate profits
  • concern about prospects for economic growth
  • heightened uncertainty regarding the future course of domestic regulatory and fiscal policies
  • a persistent reluctance on the part of firms to undertake new projects in the wake of the financial crisis

This continued weakness in business investment has led some Fed officials to speculate that “the sluggishness in business investment could portend a broader economic slowdown,” but other meeting participants remained optimistic that business investment could still pick up, given the “recent turnaround in energy prices and the greater optimism on the part of firms indicated by surveys of businesses.”

So, what’s our main takeaway here? Well, business investment continues to slow down, which is gonna be bad for growth in the long-run. Also, the Fed officials don’t know why business investment is slowing down, and they’re divided on their outlook to boot.

2. Fed is worried about the labor market

Fed Chair Yellen’s stated during her June testimonies and June 6 speech that with regard to the dismal May NFP report, “it is important not to overreact to one or two reports.” However, the minutes of the June meeting show that Fed officials actually devoted a good portion of their time discussing it. Moreover, their interpretations varied a bit, although they roughly belong to two groups: the “optimists” and the “pessimists”.

The “optimists” argued that the slowdown in jobs growth and the drop in participation rate were to be expected because labor conditions have tightened to the point that it’s near maximum employment, and that “statistical noise and the effects of a strike in the telecommunications industry” have understated the actual employment numbers, so the dismal NFP reading for May was just a “temporary aberration” so to speak. In addition, initial jobless claims have been relatively low in recent months while surveys seem to point towards a positive view of labor market conditions.

The “pessimists” fired back by saying that “the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity.” And this is supported by other labor indicators, such as the increase in the number of workers reporting that they were working part time for economic reasons (i.e. workers looking for full-time jobs, but can’t find or get one).

Despite their differences, almost all of the “optimists” and the “pessimists” agreed on one thing – “Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market.”

Fed officials generally still expect an increase in payrolls that “would be sufficient to promote continued strengthening of the labor market.” And based on Fed Head Yellen’s December speech, that increase would probably have to be around 100K per month because “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month.”

By the way, the June NFP report is coming up this Friday, so read up on my Forex Preview here if you plan to trade that event and need to get up to speed.

3. Fed is cautiously upbeat on inflation

Fed Inflation Projections

I noted in my write-up on the 5 Takeaways from the June FOMC Statement that the Fed upgraded its inflation projections. And the FOMC minutes revealed that the upgrades were due to firmer core inflation readings, rising wages, tighter resource utilization, the recent climb in oil prices, “and the stabilization of the foreign exchange value of the dollar this year.”

However, the minutes also revealed that some meeting participants had their reservations on the upbeat inflation outlook since there were many downside risks, such as “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.”

4. Fed will be focused on…

Fed Rate Hike Projections

As I pointed out in my 5 Takeaways from the June FOMC Statement, rate hikes are still in the cards since Fed officials maintained their rate hike projections for 2016, although they also downgraded their projections for 2017 and 2018. But what do Fed officials want to see before they would consider hiking rates this year?

Well, aside from the usual, namely signs of improvement in economic activity and inflation, “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,” and “Most judged that they would need to accumulate additional information on the labor market, production, and spending.” So there you have it! We now know what the Fed will be focusing on.

5. Fed is worried about… the Fed?

I’ll just leave this here:

 “Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.”

I’ll also just point out that this has been an issue that keeps popping up in the past couple of FOMC meetings. In the minutes for the April meeting, for instance, a “couple of participants” were worried that delaying another rate hike “might confuse the public about the economic considerations that influence the Committee’s policy decisions and potentially erode the Committee’s credibility.”

 


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