Fed Minutes in Focus

Yesterday evening saw the release of the Fed’s minutes from their July meeting, where policy makers held rates at the 5.25-5.5% target range for the eighth consecutive time. While the minutes underlined how further progress had been made on bringing down inflation, they nonetheless cautioned that it remained “elevated”.

The minutes stated that policy makers saw how “risks to the inflation forecast were still seen as tilted to the upside, albeit to a smaller degree than at the time of the previous meeting”.

As such, though the hold was unanimous, “several” policy makers considered how such progress on inflation and an easing of the labour market had “provided a plausible case for reducing the target range 25 basis points at this meeting”.

Notwithstanding these sentiments, the Fed reiterated how decisions concerning monetary policy will be “data dependent” and that “they did not expect that it would be appropriate to reduce the target range until they had gained greater confidence that inflation is moving sustainably toward 2 percent”.

At the time of the July FOMC, the latest PCE figures showed inflation falling marginally to 2.5% (over June), having eased 10bps from May’s figure and 20bps from March and April’s figures. June’s figures also put the PCE inflation rate in line with January and February’s levels.

Here, the minutes stated that “Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months.  These factors included a continued waning of pricing power, moderating economic growth, and the runoff in excess household savings accumulated during the pandemic.”

That said, the minutes also cited that “A couple of participants noted that inflation pressures might persist for some time, as they assessed that the economy had considerable momentum, and that, even with some easing of the demand for labour, the labour market remained strong.”

The minutes follow Powell’s statement that “a reduction in our policy rate could be on the table as soon as the next meeting in September” made shortly after the interest rate decision.

The minutes of course could not have captured the market tumult that followed in the wake of the Fed’s decision to hold and the BoJ’s decision to raise rates to 0.25% which saw a broad-based sell-off in equities. Nor could they have captured the string of PMI and labour market data which missed expectations – in addition to a flurry of corporate earnings which did the same – which raised recessionary fears.

Such concerns raised speculation that the Fed could be forced to conduct an emergency rate cut or cut rates by 50bps at their September meeting.

While a strong retail sales print and a miss on inflation eased such sentiments, presently, markets are fully pricing in a 25bps cut at the next FOMC and around a 27% chance of a 50bps cut.

Attention now turns to Jackson Hole where policy makers, economists, academics, and commentators will discuss monetary policy, economic conditions and the geopolitical situation.

German PMIs came in softer-than-expected this morning, with the composite figure falling to 48.5 against the consensus of 49.2. This came as Powerhouse’s Manufacturing figures dropped to 42.1 while Services came in at 51.4.

Following the release, the Chief Economist at Hamburg Commercial Bank said that “These numbers are a real mess. The recession in Germany’s manufacturing sector deepened in August, with no recovery in sight”.

It was a slightly more mixed picture in France, where despite manufacturing figures missing expectations, strong services print of 55 meant that the composite figure came in at 52.7. This was considerably stronger than the market consensus which was pointing to a 49.1 print.

Attention now turns to UK PMIs at 0930 ahead of US PMIs at 14:45.