Fed Minutes Show Divide

Policy makers divided, quarterly BCC survey, and a closer look at the Fed's John Williams.

Yesterday evening saw the release of the Fed’s minutes from their June meeting, underlining how policy makers foresee further rate hikes down the line. This reiterated Powell hawkish comments last week at the ECB’s symposium as well as the Dot Plot released after their monetary policy meeting on 14 June. Nevertheless, the minutes highlight how policy makers remained divided over whether to hike by 25bps or keep rates unchanged. While they ultimately opted for the latter, the minutes emphasises that “almost all” considered that further tightening would likely be needed this year, demonstrating that the Fed have not achieved their terminal rate yet. Some economists have considered the minutes as surprising given that they previously believed the FOMC’s decision to be unanimous, again highlighting the division within the Fed.

Following the release of the minutes, investors upwardly revised their rate hike expectations, with for example Bloomberg stating that “Powell’s messaging has helped narrow the gap between Fed officials’ estimates — which call for two more rate increases this year — and market expectations of tightening. Investors now put the odds of a July hike at 85%, compared with 62% right after the June meeting.”

As alluded to, the publication of yesterday’s minutes followed Powell’s comments at Sintra last Wednesday where he stated that “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough”. Given the release of the Fed’s dot plot shortly after their decision pause on 14 June (which left the fed funds target rate at 5%-5.25%), Powell reiterated that the “strong majority for two more rate hikes in dot plot”. As such, the Fed could be looking at a funds target rate of 5.5%-5.75%.

BCC Quarterly Economic Survey

This morning has seen the release of the British Chamber of Commerce’s Quarterly Economic Survey which has revealed that companies are beginning to see signs of easing inflationary pressures. For example, according to the survey, “less than half (45%) of UK firms expect their prices to increase in the next three months, down from 55% in Q1”. The survey also found that labour costs are the main driver of inflationary pressures for more than 2/3rds of UK businesses – rather than costs pressures from raw materials for example. Business confidence grew somewhat as well as profitability expectations (though this was before the BoE raising rates 50bps).

Fed Williams in Focus

The hawkish undertones of yesterday’s minutes were carried further by the Fed’s John Williams speaking yesterday. The FOMC member who serves as the vice chair and Federal Reserve Bank of New York President said that while the pause was the right move, “we still have more work to do”. Williams maintained that inflation is not where it needs to be and inflation is still the Fed’s number one priority. Williams conceded that inflation is coming down, however price pressures remain elevated while the housing and labour market remain resilient. Williams considered that though slowing the pace of the Fed’s tightening makes sense, more hikes are likely needed.