FOMC Minutes Preview: Look For Hints Of Enhanced Forward Guidance And Inflation Targeting

Courtesy of NewsSquawk

The July FOMC did not "set the foundation" for future policy tweaks, like enhanced forward guidance or yield curve targeting. Analysts believe this sort of policy detail may only follow the Fed's strategy review, likely due in September. Accordingly, the minutes will be parsed to see if there is any emerging consensus on a number of themes, like enhanced forward guidance, inflation targeting, the Fed's mandate, etc. If it appears as though there is an emerging consensus, it will likely trigger the Fed into shaping its communications accordingly ahead of the Jackson Hole economic symposium, August 27-28, which comes ahead of mid-September FOMC, the last before the November elections. The minutes will be published at 200pm EDT on 19th August.

STATEMENT: The FOMC left rates unchanged at 0-0.25%, as was expected, and its policy statement only saw minor tweaks; it amended its first paragraph to note that following the sharp declines, economic activity and employment have picked up somewhat in recent months, but remain well below levels seen at the beginning of the year. It also said that the path of the economy will depend significantly on the course of the virus. More notably, the Fed refrained from formalising the pace of its asset purchases within the statement, which currently are running at a clip of USD 80bln per month – some had expected this, so it will be interesting to see if the minutes explain why this hadn’t been tweaked in July. Powell said he was satisfied with the current policy stance, though reiterated the Fed was prepared to adjust its approach if necessary, and the Fed would be committed to using its tools "for as long as it takes" to ensure a strong economic recovery.

ECONOMIC SNAPSHOT: On inflation, Powell said the pandemic had left a significant imprint on inflation, and price pressures were running significantly lower than its 2% symmetric target, held down by weaker demand. On the labour market, Powell said it has a 'long way to go' to recover, and it will be a tough situation until the economy reopens. While household spending appears to have recovered around half of its decline, partly due to fiscal stimulus, however, Powell noted that businesses fixed investment was yet to recovery. The recent uptick in COVID cases is weighing on activity, and a full recovery would be unlikely until people feel safe to engage in activity, Powell said. The Fed char also added later in his press conference that high-frequency data showed that the pace of the recovery had slowed compared to midJune, though he stressed it was too early to say definitively. Nevertheless, some commentators suggested Powell’s remark implied that the Fed sees risk of an economic stall; some metrics released since the July FOMC have contributed to this narrative (retail sales data, for instance, and this week’s Empire Fed survey too). On a few occasions, the Fed chair alluded to the fact that the path forward for the economy was "extraordinarily uncertain".

ASSET PURCHASES: On asset purchases, he reiterated that the Fed would continue to buy at "at least" the current pace, and preserving the flow of credit was essential to supporting the recovery. Powell also hinted that it would require both monetary and fiscal support to address the severe current downturn, and there was a need for more fiscal support - an almost customary assertion from central bankers in the pandemic era. Since then, the NY Fed has maintained the size of its monthly asset purchases at approximately USD 80bln.

FUTURE POLICY: On the upcoming monetary policy framework review, Powell said he didn't have any fresh details, but the review would conclude in the near future (analysts expect in September); accordingly, there was nothing from the Fed boss on enhanced forward guidance parameters, nor anything about yield curve targeting, which analysts suggests will be policies whose outcome and design hinges on the framework review. The Fed has faced some criticism about the lack of messaging around the framework review, but this might ultimately be a function of a slow consensus-building process; for instance, not everyone on the FOMC is convinced which form of forward guidance the Fed should pursue; Powell himself did not want to be drawn into the question in July, and instead gave an overview of the differences between calendar-based and outcome-based guidance, noting both have an attraction in different circumstances, and adding that the Fed had not made its decision yet. And we shouldn't expect too many answers around these themes within the minutes; SGH Macro's analysts note that at most, the Minutes may lay out the trade-offs in unveiling a strategic framework and a tactical guidance shift at the same meeting; but in any case, SGH says guidance changes in the upcoming post-meeting statement will be largely data-driven, and are likely to be signalled only as the September meeting draws nearer. If, however, the minutes do reveal that there is an emerging consensus, then we can expect Fedspeak in wake of the minutes to begin guiding us – the Jackson Hole (virtual) economic symposium 27-28 August will be instrumental in that, ahead of the September FOMC (the last before the November election).