The FOMC minutes released yesterday evening from the June 13th-14th meeting reflected a Committee that is a little more divided on the timing of the expected balance sheet adjustment; despite its continued consensus on the path of future rate hikes.
In our view Fed Chair Janet Yellen is trying to manage a soft exit (now where have we heard that before) from the unprecedented policy stimulus with limited impact on bond markets or further slowing economic activity which would cause concern in the highly elevated stock market. Yellen will have to keep one eye on inflation as labour market slack has diminished somewhat and the last reported unemployment rate was 4.3%; quite a way below where the committee regards full employment at 4.6%. So far this has not had an inflationary impact and the annual change on the Fed’s preferred gauge of price pressures was just 1.4% in May, and has been constantly below the Fed’s 2% target for more than five years. The minutes noted that 'most participants viewed the recent softness' in inflation indicators 'as largely reflecting idiosyncratic factors.'
For roughly five years the Fed have tried to excuse the below target rate of inflation with ‘shorter term factors’, without actually explaining why they are consistently overestimating the lowly rate.
In regard to the balance sheet, 'several preferred to announce a start to the process within a couple of months.' However, some other FOMC participants preferred to wait until 'later in the year' to assess the outlook for economic activity and inflation. We believe, 'A couple of months' implies some participants see July as an appropriate time, although far from a majority, while, 'later in the year' would point to September or later in the year which appears to be the committee’s more favoured outlook.
In our view we have heard enough from individual Fed members on the wires over recent weeks, taken in conjunction with the minutes, to maintain our view that they will announce a tapering of the reinvestment of the balance sheet in September and then look again to see if they have the evidence to raise rates by a further 25bps in December; of course data dependent.
The next few months are extremely important to Janet Yellen as her current term at the head of the world’s most prominent central bank expires on Feb. 3rd, and President Donald Trump has not yet indicated if he will re-nominate her or indeed go for someone else to fill the position, we, like Janet… await his tweet.