In the FOMC’s latest meeting minutes, it was revealed that many policymakers have loosened their stance on additional easing. The FOMC cited that there was “substantial capacity for additional purchases without disrupting market functioning,” which essentially means that the central bank believes that there is enough room for more easing.
The minutes undoubtedly came as a big surprise to market participants. It was significantly more dovish than June’s minutes, which suggests that the third round of quantitative easing may come much sooner than what most market participants had initially expected.
If the U.S. does not show signs of picking up, the FOMC may be forced to finally hit the stimulus trigger for the third time.
Aside from quantitative easing, the FOMC minutes showed that other options were also being explored to help the economy get back on its feet. One option the FOMC considered was the extension of the near-zero interest rates policy past late 2014.
Although unlikely, the possibly of cutting the central bank deposit rate was also talked about. Two FOMC members also proposed taking a page out of the Bank of England‘s book and employing something similar to its Funding for Lending Scheme.
With all this talk of easing, it’s no wonder the markets dumped their dollar holdings after the minutes had been published. After all, if the U.S. takes on another round of quantitative easing and prints more money, it could greatly dilute the value of the dollar. This explains why the markets ditched the safe haven currency in favor of higher-yielding ones.
But one thing you have to bear in mind is that these minutes were from the July 31 to August 1 FOMC meeting. This means that these meeting minutes don’t reflect the string of upbeat reports that the U.S. rolled out over the past three weeks.
These reports are some of the most optimistic releases that the markets have seen in a while, and they definitely shouldn’t go unnoticed. So let’s do a quick rundown!
First, the NFP report delivered a huge upside surprise at the start of the month by showing that 163,000 jobs were created in July, surpassing forecasts which called for an increase of just 101,000. Then the ISM non-manufacturing PMI revealed that the non-manufacturing sector grew more than expected last month as the index rose to 52.6 instead of staying flat at 52.1.
After that, we found out that because of a 0.9% surge in exports, the U.S. trade deficit narrowed from 48.0 billion USD to 42.9 billion USD. And just last week, it was announced that retail sales almost tripled the expected growth of 0.3% by recording a growth of 0.8% in July.
Now, according to the FOMC minutes, members want to see “substantial and sustainable strengthening” in the recovery, otherwise the economy will need some sort of boost to keep it chugging along.
Let’s see… the recent string of upbeat reports certainly seems substantial. But what about sustainability?
Well, it seems like the jury’s still out on that issue. With just one month of better-than-expected results in the books, it’s too early to say if the economy can maintain this pace of growth and improvement. After all, as the saying goes, “One month does not a trend make!”
This just highlights how important the following month is for the U.S. Yes, it’ll be interesting to see if the economy can follow up this month’s reports with more gains next month. But it’ll be even more interesting to hear what the Fed has to say in the Jackson Hole Symposium at the end of the month and in its next FOMC statement on September 13!