FOMC Minutes Indicate Balanced Assessment of Risks, Possibly September Hike

The minutes of the July-August FOMC contained a strong assessment of growth, expressed “increased confidence” in a sustained return to the inflation target, and indicated that a further hike would “likely soon be appropriate.” Although participants discussed a broad range of risks, including the yield curve, housing, and trade disputes, the committee as a whole did not seem overly concerned about them. We increased our subjective odds of a hike at the September meeting to 90%.

The minutes of the July-August FOMC meeting indicated an upbeat view of the growth outlook among the Committee and the staff. The staff continued to project above-trend GDP growth, and participants described recent growth as “strong”—an upgrade from “solid” at the June meeting— with “considerable momentum” in household and business spending. Participants continued to view the risks to the outlook as roughly balanced. They described fiscal policy and labor market strengthening as “supportive of economic growth in the near term,” although a few participants pointed to the possibility that Q2 GDP growth was “boosted by transitory factors.”

While  participants regarded a “large-scale and prolonged dispute over trade policies” as likely to have “adverse effects” on business sentiment, investment, and employment, some participants noted that “most” businesses with trade concerns had not cut their investment or hiring yet. Similar to the statement, participants noted that core and headline inflation had “remained near 2 percent,” with recent readings “close to their expectations.” A few participants “expressed increased confidence” in a sustained return to target, and “several” viewed tariffs as “one source of upward pressure.” Similarly, the staff continued to project inflation near 2 percent over the medium term and core inflation “slightly higher” than that. Some participants expected a pickup in nominal wage growth “before long.”

On the financial stability front, some participants noted that asset valuations remained elevated and that corporate borrowing terms remained easy. During a discussion on the capital positions of large banks, some participants provided arguments both for and against countercyclical capital buffers. The staff again characterized financial vulnerabilities as “moderate on balance” and noted that while vulnerabilities in household leverage are “low-to-moderate,” they are “elevated” in the nonfinancial business sector. The minutes also foreshadowed discussions later this year on two key topics: possible alternative monetary policy strategies aimed at addressing the effective lower bound, and the Fed’s operating framework for the implementation of monetary policy.

In our view, the incremental information in the minutes on the medium-term outlook for monetary policy was balanced and consistent with a Fed hike in September. While participants mentioned trade disputes as a risk, they downplayed their impact on business activity so far. Several participants also downplayed concerns regarding the yield curve, cautioning against inferring causality from historical correlations. In light of the overall tone of the minutes and the view of many participants that a further hike will “likely soon be appropriate,” we increased our subjective odds of a hike at the September meeting to 90%. Participants agreed that the statement’s current language that “the stance of monetary policy remains accommodative” would “no longer be appropriate” fairly soon, suggesting that it could come out after an upcoming hike.