Home Minutes FOMC Minutes Show “Most Fed Officials” Saw Rate-Cut As “Mid-Cycle Adjustment”

FOMC Minutes Show “Most Fed Officials” Saw Rate-Cut As “Mid-Cycle Adjustment”


Since The Federal Reserve cut interest rates (for the first time in over a decade), the world has started worrying about recession (and the 2s10s curve inverted)…

Which might explain why US equity markets have floundered as bonds and bullion have been bid…

And, yuugely disappointing for President Trump, the dollar is modestly higher.

But there is one thing that has dramatically improved… the economic data!!

Source: Bloomberg

And finally, setting the scene for today’s Minutes, the market is now demanding more rate-cuts for the rest of 2019 than it did BEFORE the actual Fed rate-cut (thanks to Trump’s escalation of the trade war and China’s currency response)…

Source: Bloomberg

So, what did the dissentful, pre-tariffs, Minutes show?

The Fed Minutes are problematic for markets as they confirm that “most Fed officials see the July rate-cut as a ‘mid-cycle adjustment” and not the beginning of an epic easing cycle that investors are demanding.

Additionally, here are the key takeaways from the minutes:

On the need to remain “flexible”:

A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook.

Most saw the rate cut as a “mid-cycle adjustment”, not the start of an easing cycle:

Most participants viewed a proposed quarter- point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months.

A rate cut is not to boost the economy but to mitigate risk:

A policy easing at this meeting would be a prudent step from a risk- management perspective.

Two ultra doves were heard: Bullard and Kashkari…

A couple of participants indicated that they would have preferred a 50 basis point cut in the federal funds rate at this meeting rather than a 25 basis point reduction.

… But there were more, who favored not cutting rates:

Several participants favored maintaining the same target range at this meeting, judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment.

As usual, trade was the big concern:

Participants generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook

… but “few” were worried about the inverted yield curve:

A few participants expressed the concern that the inversion of the Treasury yield curve, as evidenced by the 10-year yield falling below the 3-month yield, had persisted for about two months, which could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response.

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Ahead of the FOMC Minutes, the odds of a 50bps cut in September had fallen to 11% (but still above where they were at the last Fed meeting).

Source: Bloomberg

What will the (admittedly dated) Minutes do to attitudes now?

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Full Minutes below: