June FOMC minutes: An unusually insecure committee

Heading into the release of the minutes to the June FOMC minutes, we were looking to see whether they could resolve the apparent discrepancy between the June FOMC statement, which contained a more upbeat assessment of recent economic developments and was consistent with at least one rate hike later this year, and Chair Yellen's verbal comments in the press conference, which suggested she and the committee have a low level of confidence about economic momentum. 

The committee remains unsure about how to interpret the Q1 GDP outturn and had concerns about the strength of private consumption spending. As a result, the committee is unusually insecure about making forward-looking statements about economic momentum, progress in labor markets, and inflation. This leads us to conclude that there is a higher-than-normal degree of uncertainty in FOMC members' own projections, given their unwillingness to take a firmer stance on the current state of the economy.

On growth in Q1, the minutes indicate that the committee saw a number of factors as restraining activity, including the West Coast port strike, adverse weather and difficulties in the seasonal adjustment process. While most committee participants recognize that these factors will prove transitory, they remain unsure of when a reversal will become apparent in the data. The committee cited "a number of reasons to be cautious in assessing the outlook," including the risk that momentum may be more permanently impaired due to stronger-than-expected drags from trade and energy, overly cautious households, uncertainty from external developments (in Greece, China, and other emerging market economies), and soft productivity growth. 

Incoming data have likely reduced the committee's concerns about growth, particularly in the area of consumption, where May personal spending levels were quite robust and revisions to retail sales data showed stronger momentum than previously reported. Notwithstanding this improvement, the committee will need to see more evidence that economic momentum is improving.

The insecurity about economic momentum permeated the committee's assessment of progress in labor markets. While "some" participants anticipated that underutilization in labor market resources would close by year-end and "several" felt underutilization was already eliminated, the committee as a whole "agreed that they would need more information on developments in the labor market to establish a solid basis for assessing whether labor market conditions had improved sufficiently to initiate tightening." 

This is viewed as an excessively indecisive statement about the ability of the committee to judge the amount of slack in the labor market. Nevertheless, it more closely corresponds to Chair Yellen's comments in the press conference that signaled an abundance of labor market slack and stands in contrast to recent comments by Vice Chair Fischer that the economy is nearing full employment

Barclays notes:

• We maintain our baseline outlook for a rate hike in September, given our conviction about incoming data and their signal about economic momentum. 
  
  
• We are more willing to look through the anomalous Q1 outturn and believe subsequent data and pending revisions to GDP will signal the economy remains healthy. Thus, we expect further progress in labor markets and a gradual firming of inflation towards the Fed's mandate. 
  
  
• While external risks have risen, we do not see them as severe enough at this stage to derail our outlook for the US economy. Nevertheless, an unusually insecure Fed and rising external risks certainly open the door for FOMC members to seize on any point of weakness or uncertainty to delay rate hikes. 
  
  
• We look to Chair Yellen's speech this Friday in Cleveland and next week in front of the House to provide her current assessment of the outlook, progress in achieving the dual mandate, and how the committee weighs the balance of risks from abroad.