Editor’s Note: Before I get into today’s topic, I’m sure everyone has noticed how China has exploded in the news since I wrote about it on Tuesday. China’s stock markets have continued to fall, and some analysts now worry that China may be facing a 1929-like crash. You read it here first… Now on to our topic for today.
The minutes from the Federal Open Market Committee’s (FOMC) June 16-17 policy meeting were made public yesterday, and there were no big surprises, at least for me. There was, however, a curious new discussion that I will talk about below.
As we already knew from the policy statement issued on June 17, the Committee did not seriously consider raising the Fed Funds rate at the June meeting; however, there was one member who argued for “liftoff” in June (most likely Jeffrey Lacker, president of the Richmond Fed). The other members generally agreed that they needed to see additional strength in the economy and an increase in inflation before initiating liftoff.
“All members but one indicated that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough to return inflation to the Fed’s annual 2% target.”
As for the economy, the minutes described it as “improving moderately.” The minutes noted that personal consumption expenditures (PEC) appeared to “pick up early in the second quarter.” They also noted that consumer confidence was on the rise. However, some members warned that the economy might not rebound as quickly in the 2Q as previously expected, another reason to delay liftoff a while longer.
The Committee again expressed concerns over Greece and in following, Europe. They also expressed concerns about China’s slowing economy. There was no mention of China’s stock market woes since most of the damage we’ve seen so far occurred after the June FOMC meeting. It will be interesting to see what the members have to say about China at the July 28-29 FOMC meeting; of course, we won’t get the minutes for that meeting until mid-August or so.
Given the fact that conditions in both Greece and China have worsened considerably since the June 16-17 FOMC meeting, a growing number of Fed-watchers now believe that there won’t be a Fed Funds rate hike at all this year. At this point, it seems pretty clear that a majority of the members would like to see a small increase in September, followed by another in December. But with all the uncertainty in the world, and jitters in our own equity markets, that may not be possible.
A New Twist
After the Fed’s previous policy meeting on April 28-29, there was speculation that the Committee might consider announcing the first rate hike at one policy meeting but not actually implement it until the next meeting – in an effort to soften the blow, so to speak. Most Fed-watchers dismissed the idea.
However, the latest minutes reveal that there was in fact a discussion at the June meeting regarding how to best communicate to the public the news of the first rate hike. Read it and I will continue.
Participants also discussed plans for publishing operational details regarding the implementation of monetary policy around the time of the first increase in the target [Fed Funds] range. All participants supported a staff proposal for the Federal Reserve to issue an implementation note that would communicate separately from the Committee’s postmeeting policy statement the specific measures to be employed to implement the FOMC’s decision about the stance of policy. [Emphasis mine.]
The discussion goes on to say that this separate so-called “Implementation Note” would be released to the public simultaneously with the policy statement following each FOMC meeting. This is something totally new.
If I’m reading the latest Fed-speak correctly, it could very well be that the Committee will announce the first rate hike in an upcoming FOMC policy statement, and simultaneously explain the details of how it’s going to do it in the Implementation Note. Then they would actually raise the rate later on. As noted above, all of the FOMC members liked this idea.
I’ll stay on top of this and let you know when I have more details.
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