Second Look at the Federal Open Market Committee July Meeting – Two Bullets Dodged, What Next?

The minutes from the July meeting of the Federal Open Market Committee (FOMC) confirm that the committee viewed the combination of an abrupt slowdown in payroll employment growth in May, and the uncertainty surrounding the implications of the UK referendum on leaving the European Union (“Brexit”) in late June, was too much risk to bear, and chose not to take the next step in removing policy accommodation (raise the federal funds rate) at the July meeting. The committee acknowledged that payroll employment rebounded strongly in June and the volatility in the financial markets dissipated relatively quickly following the referendum, but agreed “it was prudent to accumulate more data to gauge the underlying momentum in the labor market and economic activity.”

With these two bullets dodged the deliberations turned to “if not now, when?” and meeting participants’ views ranged from concern about drag on a still weak economy, to the potential harm associated with leaving interest rates too low for too long. Some participants felt “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.” Some “judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.” Others “expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.”

The statement released immediately following the July meeting made clear the FOMC remains cautiously optimistic about the recovery, and the minutes provide a view of the tug of war between caution and readiness to take the next step. Accumulating more data sounds more like December than September to me.

 



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