US Economic Notes:June FOMC minutes reinforce "Septaper"

The minutes of the June 14 FOMC meeting indicated that the Fed remains on trackto begin the process of balance sheet normalization at the September meeting.

    Specifically, the minutes stated that "Several preferred to announce a start tothe process within a couple of months; in support of this approach, it was notedthat the Committee’s communications had helped prepare the public for such astep." This aligns with Yellen’s statement at the post-meeting press conferencethe phasing out of reinvestments could start “relatively soon.”In our view, the Fed will likely take a pause on its rate hiking cycle in Septemberalthough the discussion of financial conditions within the minutes introduced abit of uncertainty in this respect. The minutes noted that "A few participants alsojudged that the case for a policy rate increase at this meeting was strengthened bythe easing, by some measures, in overall financial conditions over the previous sixmonths." In this context it is worth noting that our financial conditions index hasrecently reached the loosest (i.e., most supportive of growth) levels since 2014.

    To be sure, the healthy debate about the inflation outlook argues for deferringthe next rate hike to a later date. There was one important line in this regard:"However, a few participants who supported an increase in the target range atthe present meeting indicated that they were less comfortable with the degreeof additional policy tightening through the end of 2018 implied by the June SEPmedian federal funds rate projections. These participants expressed concern thatsuch a path of increases in the policy rate, while gradual, might prove inconsistentwith a sustained return of inflation to 2 percent." Thus, while financial conditionswere a factor in the Fed going twice in the first half of the year, the recent inflationslowdown is clearly causing a few Fed policymakers to rethink their outlook fortightening. This would argue for holding off until December for the next ratehike, which remains our base case. By that time, evidence that core inflation hasbottomed and is trending upward toward the Fed’s target should allow the Fedto raise rates again.