Minutes Reveal Cluelessness
As expected in this corner, the 13-page FOMC Minutes reveal nothing we did not already know.
25 Highlights (Emphasis Mine)
- Probabilities placed on rate hikes next year and in 2022 declined.
- Total nonfarm payroll employment expanded robustly in June, as it did in May, but the gains in those two months offset only about one-third of the jobs lost in March and April.
- Overall, real consumer spending remained well below the levels that prevailed at the beginning of the year.
- Housing-sector activity bounced back strongly in recent months, likely boosted in part by the effects of low interest rates.
- In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported a notable tightening of lending standards on commercial and industrial (C&I) loans to firms of all sizes in the second quarter. Standards were reported to be at the tighter end of their range since 2005, a marked change from a year ago.
- Credit quality of nonfinancial corporations deteriorated further over the intermeeting period, with a sizable volume of speculative-grade debt downgraded in June. Defaults in May reached their highest single-month volume since 2009, and June defaults were high as well.
- The staff assessed vulnerabilities due to nonfinancial leverage to have risen from moderate to notable, reflecting declines in household incomes and business profits; such declines implied less resilient borrowers.
- In the U.S. economic projection prepared by the staff for the July FOMC meeting, the estimated level of real GDP in the second quarter was marked up compared with the June meeting forecast, reflecting the better than-expected data through June. Nevertheless, economic activity still appeared to have declined at a historically rapid rate in the second quarter.
- Some participants noted that small businesses were under significant strain. Participants noted that, in light of conditions in the business sector, business investment spending continued to be subdued.
- Participants noted that the fiscal support initiated in the spring through the CARES Act had been very important in granting some financial relief to millions of families. A number of participants observed that, with some provisions of the CARES Act set to expire shortly against the backdrop of a still-weak labor market, additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead.
- Other risks cited included the possibility that fiscal support for households, businesses, and state and local governments might not provide sufficient relief of financial strains in these sectors and that some foreign economies could come under greater pressure than anticipated as a result of the spread of the pandemic abroad.
- Several participants noted potential longer-run effects of the pandemic associated with possible restructuring in some sectors of the economy that could slow the growth of the economy’s productive capacity for some time.
- With regard to the behavior of household spending in recent weeks, participants pointed to information from District contacts and high-frequency indicators (such as credit and debit card transactions and mobility indicators based on cellphone location tracking) as suggesting that increases in some consumer expenditures had likely slowed in reaction to the further spread of the virus.
- Many participants commented that the pace of employment gains, which was quite strong in May and June, had likely slowed.
- A few participants noted a risk that longer-term inflation expectations might move below levels consistent with the Committee’s symmetric 2 percent objective. Participants also noted that a highly accommodative stance of monetary policy would likely be needed for some time to support aggregate demand and achieve 2 percent inflation over the longer run.
- Participants observed that uncertainty surrounding the economic outlook remained very elevated, with the path of the economy highly dependent on the course of the virus and the public sector’s response to it.
- Several risks to the outlook were noted, including the possibility that additional waves of virus outbreaks could result in extended economic disruptions and a protracted period of reduced economic activity.
- Nonfinancial corporations had carried high levels of indebtedness into the pandemic, increasing their risk of insolvency. There were also concerns that the anticipated increase in Treasury debt over the next few years could have implications for market functioning.
- All participants considered it appropriate to maintain the target range for the federal funds rate at 0 to ¼ percent.
- Participants continued to judge that it would be appropriate to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.
- Participants also judged that, in order to continue to support the flow of credit to households and businesses, it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency residential mortgage-backed securities (RMBS) and CMBS at least at the current pace.
- Several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee’s 2 percent objective.
- Some participants observed that, due to the nature of the shock that the U.S. economy was experiencing, strong fiscal policy support would be necessary to encourage expeditious improvements in labor market conditions.
- Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
- To support the flow of credit to households and businesses, members agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency RMBS and CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.
There is little if anything in the minutes we did not already know or was not already obvious.
Points 5, 6, 9, 10, 12, 16, 18, and 25 merit closer consideration.
The WSJ commented on the minutes and also on the July 29 new conference following the Meeting.
The conclusion of the review “will inform everything we do going forward,” Mr. Powell said at a July 29 news conference.
But at the same time, he said the central bank preferred to maintain as much flexibility as it could about its next moves. “I can’t give you a specific trigger,” he said. “It really just is when we think it would help.”
“Social distancing measures and fast reopening of the economy actually go together,” he said. “They’re not in competition with each other.”