Coverage: Parsing the Fed minutes for July

The Federal Reserve Board released the minutes of the Federal Open Market Committee meeting from July, and that means economics reporters spent Wednesday afternoon trying to decipher what they mean.

Jon Hilsenrath of The Wall Street Journal had the news:

The Fed’s Wednesday release of minutes from its July 26-27 meeting suggested a rate increase is a possibility as early as September, but that the Fed won’t commit to moving until a stronger consensus can be reached about the outlook for growth, hiring and inflation.

Several officials, still not yet confident that inflation will rise to the Fed’s 2% objective after running below target for four years, weren’t prepared to consider a rate increase. Others, believing the U.S. is close to a fully recovered job market, thought a rate increase would soon be warranted, according to the minutes.

“Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information,” the minutes said.

The Fed raised its benchmark federal-funds interest rate from near zero in December, and began the year expecting to nudge rates up four more times in quarter-percentage-point increments in 2016. It hasn’t moved because of recurrent worries about growth, hiring and turbulence overseas.

David Shellock of the Financial Times looked at how the dollar reacted to the minutes:

The minutes came hard on the heels of hawkish comments this week from William Dudley, vice-chair of the Fed’s Open Market Committee and president of the New York Federal Reserve, who appeared to put the prospect of a September rate rise back on the table.

Alan Ruskin, strategist at Deutsche Bank, said the standout feature of the headlines of the minutes was the extent to which the Fed appeared to be split.

“They seemed divided on inflation risks; financial risks as they relate to low rates; and international risks. In sum, my read of the FOMC headlines are they read somewhat more dovish than the lead we have had from Fed officials recently, most obviously Mr Dudley.

“I think Mr Dudley could not have been clearer on the market being mispriced on Fed rate risks,” Mr Ruskin added. “In retrospect Mr Dudley may have decided to talk on Tuesday specifically to get away from the message of a divided and potentially less than coherent Fed that the minutes provide.”

By the close of New York trading, the dollar was flat against the yen at ¥100.31, well off a high in Asia of ¥101.15, but little changed from where the currency pair stood just before the minutes were released. The euro was a shade higher at $1.1281 — but well off a post-minutes peak of $1.1315.

Matt Kranz of USA Today wrote that investors focused on one word — “soon” — from the minutes:

Stocks were stable after the news as investors focused on the Fed’s increased faith in the strength of the economy, but also the fact that the Fed still seems torn.

“After two months of surprisingly strong job gains there had been signals from some Fed members that a rate hike was inevitable by September, but the minutes confirm that the majority of the members of the FOMC are willing to wait for more data to confirm the health of the labor market and the overall economy before raising rates,” says Tara Sinclair, chief economist at job site Indeed.com and economics professor at George Washington University.

Fed officials still appear to be largely divided on whether the economy is strong enough to warrant a rate hike, though. Recent economic strength, most notably the jobs report in July, has added fuel to the growing suspicion the Fed could move to slow things down. During July employers added 255,000 jobs, a strong showing for the second-straight month. Inflation continues to be tame, too. The Labor Department’s inflation reading for July showed prices remained flat, thanks in part to lower gas prices. But even core inflation, which excludes food and energy costs, rose just 0.1%, which was slightly less than the 0.2% many economists expected.