The market’s main focus will be any clarity the Minutes provide regarding the Fed’s thinking on an interest rate hike at its September meeting.
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The low level of inflation and wage inflation is creating doubts: Some participants cited downside risks to inflation, pointing to the absence of any noticeable response of inflation to the reduction in resource slack over the past several years, risks of further declines in oil and commodity prices, and the possibility of further appreciation in the dollar.
The minutes of the July 28-29 FOMC meeting, released early due to a mistake by Bloomberg, showed an FOMC which remained undetermined on the timing of the first rate hike.
To further reflect the Committee’s assessment that economic conditions had continued to progress to- ward its objectives, the Committee slightly altered its characterization of when it anticipates that it will be appropriate to begin the process of policy normalization. The consumer price index was not that exciting and was not that driving markets as it failed to bring in any surprises, a lower-than-expected pace of inflation was not flashed. Many members thought that labor market underutilization would be largely eliminated in the near term if economic activity evolved as they expected.
With the release of the Minutes we’ll get an inside look at the Fed’s discussions last month. Officials expected exports would continue to be a drag on economic growth in the second half of 2015, “reflecting in part the damping influence of the dollar’s earlier appreciation”. “The ongoing rise in labor demand still appeared not to have led to a broad-based firming of wage increases”. “Several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook”, the minutes said.
“Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range”.
The Fed also lowered its expectation for inflation.
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Since the July meeting, US economic data has been on the strong side with not only payrolls but service-sector ISM, retail sales and industrial production all suggesting that the economy is in pretty good shape – this is important since “almost all members” indicated that they would like to se more evidence that economic growth was sufficiently strong before voting to raise rates.
