RBS with an FOMC Minutes preview:
In our view, the tone of the policy debate won't change all that much after the release of the FOMC minutes from the July 26-27 meeting. Consistent with the Fed statement, we do not expect the minutes to contain material surprises. However, the minutes could flesh out some details on officials' decision to reintroduce language around risks. The July FOMC statement noted "near-term risks to the economic outlook have diminished." At the margin, we believe this marks a small step in the sequencing of language used ahead of a rate hike. In our opinion, discussion here would probably be one of the most interesting aspects of the minutes.
Something else to keep track of will be any discussion on lower potential growth and the neutral Fed funds rate. In a recent interview, Fed Governor Powell offered some sympathy to the secular stagnation view-adding to the growing list of FOMC members who have cited this as a reason to be cautious about the timing and path of rate hikes. Mr. Powell said, "The median estimate on the committee is 3% for the long-term federal funds rate. It could be lower than that, in my view." The minutes from the June FOMC meeting briefly added a new wrinkle to the discussion on the neutral rate, citing factors such as slow productivity and demographic trends as reasons for participants lowering their long-run estimates. In prior FOMC communications, officials generally attributed lingering "headwinds" from the recession that could restrain growth and lower the neutral rate. We suspect a fair amount of time was dedicated to this topic at the July meeting and any added color here is likely to be interpreted as dovish.
Meanwhile, the July FOMC communiqué upgraded its current economic assessment, noting both the strengthening in the labor market and a moderate expansion in overall economic activity. With respect to payrolls, the FOMC explicitly acknowledged the rebound in job growth saying, "Job gains were strong in June following weak growth in May." The statement also mentioned "payrolls and other labor market indicators point to some increase in labor utilization in recent months", a subtle shift relative to January when the last time officials referenced "some additional decline in underutilization of labor resources" [emphasis added]. The alteration likely reflects officials probably believe they are close to or at full employment. (Note: As of June, the FOMC longer run median unemployment rate projection was 4.8%.) In addition, household spending was said to be "expanding strongly" (an upgrade). That positive sentiment on jobs and spending could well find its way into the minutes too. In the end, we may learn more about near-term policy from Chair Yellen's Jackson Hole speech on Friday, August 26 - and, of course, from the key economic data to be released in the first week of September
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