The Federal Open Market Committee [1]released their July 26-27, 2016 minutes noting the changes seen in financial markets and open market operations as well as reviewing the economic state, financial state, and economic outlook. The Committee’s minutes reflected a sense of division among the members but a general sense of relief from predictions made from June to July.
The minutes state that the information reviewed for the July 26-27 meeting indicated that labor market conditions generally improved in June and that growth in real gross domestic product (GDP) was moderate in the second quarter. The Committee determined that consumer price inflation continued to run below the Committee's longer-run objective of 2 percent. They attributed this to earlier decreases in energy prices and in prices of non-energy imports.
The minutes state that domestic financial conditions remained accommodative during the period of time from the previous committee meeting in June to the most recent in July. The Committee notes that equity price indexes increased, despite a sharp decline following the Brexit vote, and corporate bond spreads declined on balance. Despite this, conditions in business and consumer credit markets were about unchanged, according to the Committee. Additionally, the expected policy path of the federal funds rate implied by market quotes was little changed, but fluctuated notably over the intermeeting period.
The Committee viewed the uncertainty around its July projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. Instead, the risks to the forecast for real GDP were seen as tilted to the downside, and this reflected the assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. Additionally, the minutes note that the committee continued to see the risks to the forecast from developments abroad as skewed down. This was reported to be consistent with the downside risks to aggregate demand. The Committee viewed the risks to its outlook for the unemployment rate as tilted to the upside. Also noted were the risks to the projection for inflation that were still judged as weighted to the downside. This reflected the possibility that longer-term inflation expectations may have edged lower.
The Committee also discussed the real GDP growth and how it was estimated to have picked up in the second quarter, consistent with the forecast in June. The minutes state however that the projected step-up in real GDP growth over the second half of this year was marked down a little, partly reflecting softer news on construction. Likewise, the forecast from the Committee for real GDP growth in 2017 and 2018 was little revised, as the positive effects of a slightly lower assumed path for interest rates and a stronger trajectory for household wealth were mostly offset by the restraint from a weaker outlook for foreign GDP growth and a slightly stronger path for the foreign exchange value of the dollar. The minutes state that the unemployment rate is expected to remain flat over the second half of this year and then to gradually decline through the end of 2018.
The forecast for consumer price inflation over the second half of 2016 was a little lower than in the previous projection, though, according to the minutes. This is due to recent declines in crude oil prices being expected to hold down consumer energy prices. The minutes note that the Committee continues to project that inflation will increase over the next several years, as energy prices and the prices of non-energy imports are expected to begin steadily rising this year and as resource utilization was expected to tighten further. Despite this, inflation is still projected to be slightly below the Committee's longer-run objective of 2 percent in 2018.
“The FOMC minutes continue to reflect divisions within the committee. The constant refrain of 'data dependency' from Fed officials loses its meaning when there is no consensus on what the data means, much less which policy course is warranted,” says Curt Long, Chief Economist for The National Association of Federal Credit Union. “Nevertheless, it seems safe to say that many of the committee’s fears were alleviated with the strong June jobs report and by Brexit’s lack of impact on financial markets. With inflationary pressures yet to emerge, the Fed seems happy to play the waiting game as far as rate normalization is concerned. As a result, we anticipate no rate hike until December or later.”
To view the full minutes, click HERE [2].