July FOMC Minutes
by Craig Dismuke, Dudley Carter
While investors hoped the Minutes from the Fed’s July meeting might shed more light on the review of the monetary policy framework and potential changes to forward guidance for interest rates, the afternoon release left them none the wiser. Starting with the economic assessment, the discussion unsurprisingly highlighted that activity had picked up in the weeks leading up to the meeting, but quickly cautioned that the recovery to date had only been partial and the outlook remained highly uncertain and contingent on the unknowable path of the virus. Consumer spending had recovered more than business investment, dynamics credited to the significant fiscal stimulus amid a highly uncertain economic environment. As a result, the Fed pledged continued support from its full range of tools until achieving its full employment and inflation mandates are a probable outcome.
However, the bigger interest was in any insight on the status of the framework review, the culmination of which could be accompanied by a shift in how the Fed addresses its inflation mandate (e.g. a change to average inflation targeting) that leads to stronger forward guidance for interest rates. Those that believe an announcement could come at the September meeting could point to a desire to “finalize all changes to the [Statement on Longer-Run Goals and Monetary Policy Strategy] in the near future” to support their position. Those that expected more were likely disappointed by the statement “that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” somewhat softer language than the “at upcoming meetings” reference in the June Minutes. Nonetheless, the eventual adoption of outcome- or calendar-based forward guidance, or a mix of the two, clearly has more support than yield caps and targets.
Bottom Line: There remains quite a bit of uncertainty about how the Fed will conduct monetary policy moving forward and the timing of an announcement remains open for debate. However, officials are quite certain and clear they plan to keep rates low for an extended period in whatever framework they ultimately choose. The lack of a final answer should heighten the interest in next week’s virtual “Jackson Hole” policy symposium.