Fra BNP Paribas
FOMC minutes: Prudently patient – The July FOMC minutes highlighted the Committee’s reluctance to jump to any conclusions when faced with slowing payrolls and faint signs of economic strength.
There was a bit of everything for everyone peppered throughout the July minutes with the overall sentiment supportive of our out-of-consensus view. – There was broad support that the 150,000 three-month average for payrolls was enough to push down the unemployment rate. In our view, when faced with a three-month average for payrolls north of 250,000 (given our forecast for 215,000 in August), and a less-risky global market environment, the Committee will raise rates in September.
– There were dovish concerns from several members that a further slowing in payrolls would be worrisome and would foster a “less compelling” case to raise rates in the near term. After the second solid month of payrolls for July, released after the July FOMC meeting, which propped up the three-month average to a more robust 190,000 and adds an expected, further boost to reach 250,000 before the September meeting, we think the bulk of these members will be more supportive of a rate hike.
– Also on the dovish side, several participants thought that the Committee has “ample time to react” to faster inflation, however, only a couple of members thought it was a necessary condition to see “more evidence that inflation would rise to 2 percent on a sustained basis” before “taking another step in removing accommodation.”
– The labor market assessment was more upbeat than we expected. There were signs of relief that Brexit risks had diminished – though a few members were still worried about medium-term risks – and the Committee sounded more confident that the underlying drivers of domestic demand had strengthened.
– Going into the release, fed funds futures prices suggested investors saw only a 26% probability of a hike in September, and a 53% probability of a hike by December. Now these probabilities are 20% and 48%, respectively. We continue to think the market is underpricing the odds of a rate hike in September.
– Recent Fed communications, including the July FOMC meeting minutes, indicate a rethink of policy strategy is underway. The June FOMC meeting minutes gave a similar impression, in addition to recent commentary from St. Louis Fed President Bullard and San Francisco Fed President Williams. The topic of this year’s Jackson Hole conference (Designing Resilient Monetary Policy Frameworks for the Future) suggests these themes will get further airtime in coming weeks.
– The July FOMC meeting minutes included a special section on the “long-run monetary policy implementation framework,” with an important caveat that decisions regarding an approach “would not be necessary for some time.”
– We take signal from NY Fed President Dudley and Atlanta Fed President Lockhart, who have interpreted the trend in the economy as supportive of a rate hike as soon as the September meeting. We do not think the Fed will be impaired by the pending elections, but rather will most likely focus on the real economy and the pace of job gains.
– In our view, with the FOMC’s explicit preference for labor market data as opposed to GDP, it will be difficult for the Committee to stare at a three-month average gain for payrolls north of 250,000, and decide that they need to see more.
