Far Less Hawkish
Macro Perspectives
We had the Fed minutes - if left to the headline summary on the newswires, one would get a hawkish impression. The markets responded as such (lower stocks, higher yields).
Remember, the Fed told us after the July meeting that they would be completely "data dependent" in determining the path forward for monetary policy.
With that in mind, the headlines from the meeting minutes pointed to two areas they saw as "necessary" to "restore economic balance":
below trend growth,
a softer labor market.
Well, as we discussed yesterday, the Atlanta Fed model, thus far, is projecting a 5% annualized growth economy in the third quarter (well above trend) - so, condition number one is far from being met.
Another headline said participants said the labor market is still "very tight" - that sounds like a vote against condition number two.
Moreover, another headline that stuck out: Most participants saw continued "significant" upside inflation risks. Sounds like a Fed hell-bent on delivering more rate hikes, no?
More likely, we've just seen another example of Fed public perception manipulation (or as they call it, "guidance"). The Fed doesn't want to signal "mission accomplished" to consumers, businesses and investors - it would be the equivalent of pressing the gas pedal on the economy.
So, to be sure, those few headlines on the wires were carefully curated by the Fed.
With a little context, the same paragraph within the minutes that said "most" participants saw "significant" upside risks to inflation, also said that "some" participants saw downside risks, from the lag effects of policy. And "a number" saw the risks as two-sided.
This doesn't sound like the unanimity we've seen on the rate decisions.
The July hike was a unanimous decision (among the 11 voting members), despite a headline inflation rate that had fallen to 3% - a full percentage point lower than the inflation data available to them the month prior, within which they chose to hold rates steady (unanimously).
With that in mind, it appears, from reading the minutes, that there was indeed some dissension.
"Almost" all participants agreed raising rates at the July meeting. "A couple" favored leaving rates unchanged. Clearly these dissenters were among the six non-voting Fed district presidents. It's probably a good proxy on where the Fed really is - far less hawkish than they present themselves to be.
With that, we're a little more than a week away from the Kansas City Fed's economic symposium in Jackson Hole.
This annual event is well attended by the world's most powerful central bankers and finance officials, and has a history of signaling policy adjustments. As we discussed last week, perhaps this will be an "end of the tightening cycle" theme.
Deflation in China, and a technical correction in stocks (perhaps underway) would give them the cover to do so.
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