“Most Fed officials saw conditions for a rate rise rising” but still “not warranted”. There is an initial headline from Bloomberg about the minutes, coming in around 20 minutes before the publication. The text also consists of “considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation”.
The last comment might be coming from Janet Yellen. Without confidence about wage increases, there is no real underlying inflation in the future. And if Yellen doesn’t see inflation, there is no rush for a rate hike. The dollar initially strengthened but is now moving in the opposite direction.
From the minutes
One member wanted to vote for a rate hike (Lockhart?), but more members wanted more evidence before raising the rates. And this member agreed to wait.
On employment: labor market slack would be largely eliminated in the near term.
On wages: “considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation”. This may be coming from Fed Chair Janet Yellen.
On inflation: There was a lack of confidence that prices would go up. Some members wanted to see more evidence that economic growth was sufficiently strong.
They did express concern about the impact of a rate hike: some were afraid of the impact on financial markets while others saw a hike as a sign of confidence. In any case, they were worried about the impact.
The minutes are from a meeting that was held in July, but they were in edited in recent days.
Assuming that these minutes are truly from before the recent slump in oil prices and the Chinese yuan devaluation, they could be even more dovish.
When the Fed hikes, it will be a sign of confidence in the US economy. However, the minutes show anything but confidence.
Market reaction
After the initial rise in the dollar on the “gradually moving towards a rate hike” leaked headlines, the picture looks totally different:
- EUR/USD is up to 1.1120. EUR/USD was trading around 1.1050 before the publication.
- GBP/USD is getting closer to reconquering 1.57
- USD/JPY slips below 124 to 123.83.
- USD/CAD, which was impacted by oil, is sliding to 1.3105.
- AUD/USD has recaptured 0.7350.
- NZD/USD is above 0.66.
In addition, the market gives a lower chance to a rate hike in September. It fell from 48% to 38%.
Jon Hilsenrath of the WSJ is closely watched by markets. He noted that the Fed did not show any clear sign of having settled on a decision.
Also Goldman Sachs point to dovish hints in the minutes.
The reaction in short term bonds also show that the Fed is not in any hurry to raise rates.
But here is another point of view: September hike still on the cards after FOMC Minutes – CIBC
Background
The market was highly anticipating the minutes of the July meeting in order to get a clue about whether the Fed would hike or not in September. In that meeting, they left all options on the table.
The US dollar was stronger against commodity currencies but weaker against some of the majors towards the publication.
In general, the Fed’s two mandates are moving in different directions:
- Employment continues advancing quite nicely. While the recent NFP was not amazing, the consistent 200K+ gains are probably good enough for Yellen and co.
- Inflation is not showing signs of picking up. The Fed does not need to to see the white of inflation in the eyes: it is a lagging factor and prices have been influenced by the slump in oil and other commodity prices. Nevertheless, it is hard to see inflation really rising in the future.
As always, the Fed remains data dependent. We still have another NFP and quite a few other important figures until September 16th.
More: EUR/USD: Final Call For Dollar Strength – Danske
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