Fed Minutes in Focus

Minutes released from FOMC policy meeting, triple lock pensions, and UK retail sales released tomorrow.

Yesterday evening saw the release of the FOMC’s minutes from their latest policy meeting on 26 July which showed most policy makers still saw “significant upside risks to inflation”. This came as the Fed met expectations by raising rates 25bps, bringing the benchmark target rate to 5.25%-5.5, its highest rate in 22 years. With markets speculating on whether the Fed have reached their terminal rate, the minutes expressed some hawkish undertones, stating that persistent inflation “could require further tightening of monetary policy.” Such rhetoric was reiterated in Powell’s speech following the rate decision where the Fed Governor maintained that the CB would remain “highly attentive to inflation risks” and “continue to assess additional information and its implications for monetary policy”. As such, Powell concluded “I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted”.

The minutes also showed that two Fed officials “could have supported” keeping rates unchanged, proving some dovish undertones. Here, the minutes stated that “they judged that

maintaining the current degree of restrictiveness at this time would likely result in further progress toward the Committee’s goals”. Hence, with inflation coming down in line with projections and just 1.3 percentage point off their target level, some policy makers consider monetary conditions to be sufficiently tight. However, given that US growth appears to remain resilient in light of monetary tightening and was considerably stronger-than-expected over Q2, some policy markers remain concerned that the world’s largest economy potentially remains too hot.

At the back end of last week, money markets were pricing in around a 22% chance of a 25bps hike between now and November, with this being upwardly revised to a 28% chance yesterday. Presently, implied money markets expectations are now projecting around a 32% chance of a 25bps rate hike between now and November. As such, the general market consensus is pointing to the notion that the Fed have likely achieved their terminal rate.

Triple Lock, Safe and Secure

Yesterday evening, Prime Minister Rishi Sunak tried to reassure pensioners by maintaining that the triple lock pension remains safe and secure. With Sunak trying to safeguard the support of the elder proportion of the electorate ahead of the next general election, the PM stated that “of course the government is committed to its policy on the triple lock”.

The triple lock ensures that that pensions rise by the highest of either inflation, average earnings, or 2.5%. Hence, with CPI at 6.8% in July and average earnings growth (including bonuses) at 8.2%, the cost of rising the state pension for the 12m or so on a full state pension would cost the Treasury an additional £10bn a year. According to the Office for Budget Responsibility, the latest increase in the state pension will have added around £14 billion to this year’s pensions expenditure, feeding into the total bill of around £124 billion.

All Eyes on UK Retail Sales Tomorrow

Tomorrow morning will see the release of UK Retail Sales, which are forecasted to come in at a 0.5% contraction on a month-on-month basis, a considerable deceleration from last month’s print of 0.7%. As we looked at earlier this month, the BRC note that 6,000 retail outlets have been closed in the UK in the past five years. This has come as the country has of course grappled with a pandemic, decades high levels of inflation, and tight monetary and fiscal conditions. As such, the retail vacancy rate has risen from 13.8% in Q1 2023 to 13.9% in Q2.