Another ‘Good News, But Maybe Not’ Fed Meeting Minutes

The minutes from the July Federal Market Open Committee meeting were what has become a trademark mix of acknowledgement that inflation might be slowing along with warning that if it does not, future rate hikes are still possible.

First, some of the upbeat portion. “Market participants interpreted data releases as generally demonstrating economic resilience and a further easing of inflation pressures,” the minutes said. Concerns about the banking sector, which earlier in the year was getting hit hard by investor and depositor worries about the market value of assets. Rapid and sizeable withdrawals sent several banks into receivership.

“Spot and forward measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed over the intermeeting period at levels broadly consistent with the Committee’s 2 percent longer-run goal, and longer-term survey- and market-based measures continued to point to inflation expectations being firmly anchored,” they said.

On the other side were concerns about economic conditions, as participants in the FMOC’s survey “continued to place significant probability of a recession occurring by the end of 2024,” although timing of an expected recession stretched out and the potential for avoiding a recession next year “grew noticeably.”

Participants in the survey went in expecting that there would be a July increase in the benchmark federal funds rate, as did happen. Most did expect that the July rate hike would be the last in the tightening cycle.

But that wasn’t the last word. “Participants observed that, notwithstanding recent favorable developments, inflation remained well above the Committee’s 2 percent longer-term objective and that elevated inflation was continuing to harm businesses and households—low-income families in particular,” the minutes said. “Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating and that inflation was on course to return to 2 percent over time.”

While inflation growth has slowed, headline numbers are still significantly over 2%. Shelter has continued to be a significant force in the numbers and energy costs have been rising again. The latter doesn’t affect core inflation, but still, it is something members of the committee will pay attention to.

Experts are split on what this all ultimately means. “The Fed wants to talk tough on inflation, but it’s obvious they are done with rate hikes,” Jamie Cox, managing partner for Harris Financial Group, said in an emailed note. “These minutes don’t signal a pivot back to large rate hikes.”

But then, Quincy Krosby, chief global strategist for LPL Financial said: “Both doves and hawks acknowledge that inflation remains too high, but for the most part the hawks advocate another rate hike is warranted, serving as insurance to keep inflation expectations anchored. The doves are comfortable with a pause that would allow the cumulative effects of rate hikes unwind into the broader economy. Unfortunately, with prices edging higher and consumer spending still resolutely resilient, underpinned by a solid labor market, the futures market has begun pricing in another rate hike. The July 26 rate hike was most likely not a one and done as the latest round of data suggests.”

Something to remember is that the minutes are from three weeks ago. Since then, the August Consumer Price Index and Producer Price Index figures have come out, showing increased slowing of their upward swings. But while inflation growth has slowed, headline numbers are still significantly over 2%. Shelter has continued to be a significant force in the numbers and energy costs have been rising again. The latter doesn’t affect core inflation, but still, it is something members of the committee will pay attention to.