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Comment: June 18-19 FOMC meeting minutes confirm dovish turn for consensus on heightened downside risks

As far as the outlook for monetary policy goes, the content of the minutes of the June 18-19 FOMC meeting are largely rendered moot. In the three weeks since the meeting, two things have occurred which reduced the importance of the discussion.

First, the June Employment Situation confirmed that the labor market remains strong, but also the wages aren’t rising as quickly. The hint that upward pressure on wages was lessening means the potential for an impact of price stability is also fading. This in turn allows the FOMC to not worry about a sudden burst of upward inflationary pressures with the PCE deflator running sufficiently below the Fed’s 2% objective. Thus, a balanced approach to monetary policy gives the FOMC room for a 25 basis point insurance cut in short-term rates.

Second, Powell talked about renewed crosscurrents that threaten the economic outlook in his prepared remarks for his semiannual monetary policy testimony on July 10. The lack of a trade agreement with China, an unresolved Brexit, and weakness in the global economy are all adding to risks of a downturn.

While Powell reiterated that the baseline forecast for the economy remains one of solid growth, the tone of his testimony was decidedly dovish.

The importance of the minutes was therefore diminished. However, even three weeks ago, “Participants judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks.” And while anticipating the labor market would continue strong and inflation eventually return nearer to the 2% objective, “[M]any participants attached significant odds to scenarios with less favorable outcomes.” This would suggest that the consensus toward providing the economy a little preemptive help in the face of risks “now weighted to the downside” had gained in popularity among the 17 FOMC participants.

The minutes noted that “many” participants found inflation expectations on the low side “or that the continued weakness in inflation could prompt expectations to slip further.” If so, it could be more difficult to defend the credibility of the inflation objective and achieve the symmetric 2% goal.

With “downside risks to the outlook” having “risen materially” in the intermeeting period, and prospects of another contentious round of negotiations in the offing for the federal budget and increasing the debt limit, threats to the economic outlook were heightened. The FOMC wasn’t quite ready to cut rates then, but it was alert to the necessity. “Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. “Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective,” the minutes said. However, the consensus wasn’t swayed and while a cut might be in the future, “there was not yet a strong case for a rate cut from current levels” and more information was needed. During the intermeeting period to-date, the case that the economy could use a buffer against a downturn has become clearer.

The next FOMC meeting is still three weeks away. As Powell noted in the Q&A on Wednesday morning, there’s a lot of economic data still to come that will help the FOMC shape monetary policy. Nonetheless, taking into account even with a string of solid economic data reports and if the next Beige Book (Wednesday, July 17 at 14:00 ET) delivers good anecdotal evidence of economic activity, the risks remain on the horizon and don’t look to be resolved soon. There is no guarantee that it will happened, but the odds are stacked in favor of a 25 basis point cut in the fed funds target rate.

The meeting minutes are going to convey how the Fed’s review of its monetary policy framework is shaping up. This is a broad review and until the FOMC announces a decision is made, it should all be taken as part of the reassessment to ensure that policy is appropriate and the best way to fulfill the dual mandate, and the manner in which decisions are made are well communicated.

The item at the top of the June 18-19 minutes was the discussion of a “Standing Repurchase Facility”. The minutes said, “a facility of this type would allow counterparties to obtain temporary liquidity at a fixed rate of interest through repurchase transaction with the Federal Reserve involving their holdings of select securities eligible for open market operations.” The intention of the facility “could provide a backstop against unusual spikes in the federal funds rate and other money market rates and might also provide incentives for banks to shift the composition of their portfolios of liquid assets away from reserves and toward high-quality securities.”

The discussion is a step in the Fed’s overall review of its monetary policy framework.  The debate is still early and no decisions were reached. “[P]articipants stated that additional work would be necessary to clearly define the objectives of such a facility and to evaluate its potential net benefits”, the minutes said.



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