A fair reading of the Fed minutes from the June 14–15 meeting reveals a committee in search of a reaction function and a coherent explanation for its future (in)actions. While there was lip service paid to the sentiment that the FOMC (Federal Open Market Committee) should not allow one soft U.S. labor market print to have an outsized influence on its plans for policy normalization, there appeared to be broad agreement that the May labor market report was weak enough to justify taking no action at the June meeting. That decision was made easier by an understandable desire to await the outcome and the market reaction to the Brexit vote, which was held eight days after the Fed meeting. So the minutes dutifully convey why the FOMC did not hike in June, but what insights do they provide about the conditions that will need to be met before the committee can agree on the next hike?
Very few, actually. The minutes remind us that
“… raising the target range for the federal funds rate would be appropriate if incoming information confirmed that economic growth had picked up, that job gains were continuing at a pace sufficient to sustain progress toward the Committee’s maximum-employment objective, and that inflation was likely to rise to 2% over the medium term.”
Data released in July will provide important new information on all three of these factors – U.S. growth, employment and inflation – and although it is conceivable that surprisingly strong data could tip the decision at the July Fed meeting in the direction of a hike, the Brexit vote has almost certainly taken a July rate increase off the table.
The June minutes also reinforce one other reason for the Federal Reserve to err on the side of “gradualism.” For not only does the Fed now fully embrace the idea of The New Neutral, it also conveys palpable anxiety over how uncertain the committee is about where it is today or where it is heading. Confronting this uncertainty is one thing, but with 13 mentions of “uncertainty” in the June minutes, the FOMC appears to be running the risk of wallowing in it.
In perhaps the understatement of the year, the June minutes tell us that
“Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.”
On this point, there can be little doubt. As I wrote one year ago, data dependence is not a monetary policy. It wasn’t then and it still is not today. The markets understand this. When will the Fed?