Last night we had the minutes of the FOMC July meeting, where members of the committee generally agreed that more data was needed before the US should consider raising rates, however the timing of any move remains an issue. There seems to be two trains of thought within the committee though, with some of the members wanting more evidence inflation would rise toward target before a hike, however others were concerned low rates could have a negative impact on financial stability, stating that a prolonged period of very low interest rates might cause investors to misprice risk, leading to the destabilising of financial markets.
James Bullard maintained his call for 1 hike in the foreseeable future, acknowledging risks might be on the upside, however, he still sees a target rate of 63bps as appropriate until conditions change. In a Q&A session after the meeting he said he was not sure if September or later this year is the best time to hike, preferring to see indications of higher GDP growth before moving on rates. William Dudley, an adviser to Chairwoman Janet Yellen also added “I think we’re getting closer to the day where we’re going to have to snug up interest rates a little bit. And that’s good news”.
In its press release after the meeting, the minutes stated; Against the backdrop of their views of the economic outlook, participants discussed the conditions that could warrant taking another step in removing monetary policy accommodation. With inflation continuing to run below the Committee’s 2 percent objective, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labor market and whether inflation was continuing to rise gradually to 2 percent as expected. Several suggested that the Committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis. In addition, although near-term downside risks to the outlook had diminished over the intermeeting period, some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. These participants concluded that the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand.
The last sentence in the statement is interesting. The FOMC committee now seems not only wanting to see the economy continue to grow, with inflation moving closer to the 2% target, but also needs to be confident the US economy is both strong enough and has enough momentum to withstand a ‘possible downward shock to demand’.
Meanwhile, UK retail sales for July surprised on the upside this morning. The market consensus was for a 0.3%mom increase, but retail sales beat estimates at +1.5%, bouncing from a -0.9% in June. The year-on-year was also +5.4% higher, again beating the market consensus of +3.9%. According to the Office for National Statistics, one of the main factors was sterling’s weakness; encouraging overseas buyers to spend money on fashion and jewellery. Obviously, as the saying goes ‘one swallow doesn't make a summer’, so these numbers should be viewed with caution, we will see over the coming months what the effect of Brexit has so far had on the UK economy.