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According to Kjetil Olsen and Anders Svendsen from Nordea Markets, the FOMC minutes of the May meeting released today, showed that members shared the view that this years’ drop in core inflation is mostly transitory. They see no precautionary rate cut in sight, but further inflation disappointments might bring it to the table.

Key Quotes:  

“Trade aside, ahead of the minutes both we and the markets were looking for clues as to whether Powell’s’ view on inflation being transitory was shared by the majority of the FOMC. In the minutes, participants observed that inflation pressures remained muted and that core inflation had come in lower than expected, but “(M)any participants viewed the recent dip in PCE inflation as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.” A minority of members, however, viewed the downside risks to inflation as having increased.”

“A precautionary rate cut as the markets has been chatting about seems therefore not to be in the cards. However, it seems that the Fed doesn’t completely rule out a rate cut if inflation developments disappoint going forward.”

“The minutes revealed a fairly upbeat assessment of the real economy and a number of participants mentioned that they had marked up their projections for real GDP growth. Furthermore “members noted that financial conditions had improved since the turn of the year, and many uncertainties affecting the U.S. and global economic outlooks had receded, though some risks remained.” Since early May the trade conflict has made this judgment somewhat stale, however.”

“The minutes also included further deliberations on the balance sheet normalization, but also that a decision on for instance the composition of the portfolio seems not to be happening anytime soon.”

“It feels that the majority is leaning towards a target portfolio containing only shorter-term securities with maturities of three years or less.”