Bank of America Merrill Lynch on the FOMC Minutes:

The minutes of the 27 July FOMC meeting will be of particular interest (Wed, Aug 17). The minutes have increasingly become a policy tool, at times sending a different message than the statement. In this case, we think the minutes will sound slightly more hawkish than how market participants interpreted the statement.

We will be particularly interested in the conversation about risks to the outlook. In the statement, FOMC officials noted that "near-term risks to the economic outlook have diminished", which we believe reflects the strong June jobs report and improvement in global financial conditions. We will be curious to see how much comfort Fed officials have by the tame reaction in the markets post-Brexit. While there will be a general sense of relief, we suspect that a number of Fed officials will still note that they want more time to make sure financial conditions remain favorable. This in part reflects the fact that the non-voters lean a bit more hawkish and their voice is heard in the minutes, but not the statement.

We also expect the minutes to reveal a debate about the degree of slack in the labor market. The statement noted that labor utilization has increased in recent months, suggesting that a number of Fed officials have become encouraged by the higher trend in the labor force participation rate (LFPR). This suggests that a portion of Fed officials believe there is a bit more slack in the labor market and therefore greater capacity for job growth. This is another reason for the Fed to be patient with rate hikes. There may be a discussion about the recent widening in LIBOR spreads. It is largely understood that the increase in spreads is related to upcoming money market mutual reform rather than a function of the Fed's monetary policy. We therefore think Fed officials will consider the move in LIBOR spreads to be largely an expected impact from the reforms and not a sign of material market stress. Nonetheless, it does imply an increase in borrowing costs for some, which the Fed cannot ignore.

Overall, we think the minutes will sound slightly more hawkish than the statement as Fed officials emphasize that downside risks have abated and that the US data have generally been supportive of continued growth in the economy. But the minutes are unlikely to imply an imminent hike.

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