FOMC Minutes Leaked Early After Embargo Broken, Fed Warns Risk To GDP Forecast "Tilted To The Downside"

Seconds ago, someone accidentally (we hope) pulled a Janet Yellen as the following just came Bloomberg nearly 30 minutes before the official Minutes release time:

  • *MOST FED OFFICIALS IN JULY SAW CONDITIONS FOR RATE RISE NEARING: BBG

And MarketNews promptly reacts:

  • 13:42 08/19  FOMC MINUTES: SEPT SEP WONT INCLUDE GRAPH OF PREFER LIFTOFF YR
  • 13:42 08/19  FOMC MINUTES: SEPT SEP WILL INCLUDE MEDIANS FOR ALL VARIABLES 
  • 13:42 08/19  FOMC MINUTES: REVIEW OF LONG RUN MON POL FRAMEWORK TO TAKE YRS
  • 13:42 08/19  FOMC MINUTES: SOME PARTIC NOT YET SEEN EVID INFL MOVING TO 2%
     
  • 13:42 08/19  FOMC MINUTES: SEVERAL PARTICIPANTS EXPRESS CONCERN ON CHINA
     
  • 13:42 08/19  FOMC MINUTES: SOME LANG REFLECTS FURTHER PROGRESS TOWARDS GOAL
     
  • 13:42 08/19  FOMC MINUTES: MANY PARTICIP SAW SCOPE FOR MORE LBR MKT GAINS
     
  • 13:42 08/19  FOMC MINUTES: SOME PART SAID COND HAD BEEN MET, WLD BE SHORTLY
  • 13:42 08/19  FOMC MINUTES: MOST PARTICIPANTS SAY COND NOT MET; APPROACHING
  • 13:42 08/19  FOMC MINUTES: MEMB 'GENERALLY AGREED' MORE INFO NEEDED TO HIKE
  • 13:42 08/19  FOMC MINUTES: ONE MEMBER INDICATED READY TO RAISE RATES IN JUL
  • 13:42 08/19  FOMC MINUTES: NO TIP TOWARDS SEPT LIFTOFF, DOESN'T RULE IT OUT

Treasury Yields reacted dramatically:

 

And then, about 10 minutes later, the Fed finally released the full minutes. Here are some of the key excerpts.

First, on general financial conditions:

Financial conditions were affected by developments abroad over the intermeeting period but were little changed on balance. Federal Reserve communications and economic data releases, including the June employ-ment report and retail sales data, put some downward pressure on the path of expected future short-term in-terest rates. On net, 5-year and 10-year Treasury yields were somewhat lower, measures of inflation compensa-tion over the next 5 years based on Treasury Inflation-Protected Securities declined, equity prices were little changed, and the foreign exchange value of the dollar rose modestl

... On Greece:

Over the intermeeting period, market yields fluctuated in response to news about developments abroad, including Greek debt negotiations. After having widened amid concerns about the difficult negotiations between Greece and its creditors, Greek and other peripheral euro-area sovereign spreads nar-rowed, on net, over the intermeeting period as news emerged of progress toward an agreement. 

... And China:

In China, stock prices fell substantially, prompting a number of policy and regulatory actions by Chinese officials to sup-port the stock market. While these developments at-tracted investor attention, reaction in asset markets out-side Greece and China was limited on balance

... And Puerto Rico:

Credit conditions in municipal bond markets were stable over the intermeeting period. Despite the announce-ment that Puerto Rico might seek to restructure at least part of its debt, spreads on an index of 20-year general obligation municipal bonds over comparable-maturity Treasury securities changed little, and the pace of issu-ance of long-term municipal bonds remained robust.

... And the rest of the world:

Sovereign bond yields and monetary policy expectations in the United Kingdom changed little, on net, over the intermeeting period. By contrast, yields in Canada, New Zealand, Norway, and Sweden decreased following weaker-than-expected macroeconomic data releases and additional monetary policy accommodation. The for-eign exchange value of the U.S. dollar increased during the intermeeting period against the currencies of major U.S. trading partners. Stock markets in most advanced foreign economies ended the period higher. Equity prices in emerging market economies, however, gener-ally moved lower on net.

On inflation:

The staff’s forecast for inflation was revised down, particularly in the near term, as the decline in crude oil prices over the intermeeting period was expected to result in lower consumer energy prices. Although energy prices and non-oil import prices were expected to begin rising steadily next year, the staff continued to project that inflation would be below the Committee’s longer-run objective of 2 percent over 2016 and 2017. Inflation was anticipated to move up gradually to 2 percent there-after, with inflation expectations in the longer run as-sumed to be consistent with the Committee’s objective and slack in labor and product markets projected to have waned.

On employment and the economy:

The staff viewed the uncertainty around its July projec-tions for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff’s as-sessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.

...

Rreal GDP growth over the medium term was revised down a small amount, in part because of a slightly stronger forecast for the exchange value of the dollar. The staff also made two small adjustments to its supply-side assumptions. First, the projected rates of productivity gains and potential output growth over the medium term were trimmed. With actual and potential GDP growth both a bit weaker, the projected narrowing of the output gap over the medium term was little re-vised. Second, the staff lowered slightly its estimate of the longer-run natural rate of unemployment. The unemployment rate was expected to decline gradually to this revised estimate.

On consumer spending:

With respect to consumer spending, the incoming data had been uneven but participants cited reports from contacts suggesting a pickup since the first quarter. Participants generally expected consumer spending to rise moderately over the near term. Continued gains in employment and income, high household net worth, and low gasoline prices were viewed as factors that should support consumer spending in coming months. Consumer credit conditions were also seen as favorable, with business contacts pointing to steady loan growth, esp-cially for auto loans and credit cards. However, a couple of participants were concerned about the outlook for consumer spending, noting that spending had been disappointing in recent months even though real income had already been boosted by the lower gasoline prices and the improved labor market.

On housing:

Participants viewed the recent data on housing starts and permits as well as the higher levels of sales and prices as indicative of continued recovery in the housing sector. The easing of lending standards for residential mort-gages evidenced in the most recent SLOOS was cited as a factor likely to support further progress. However, a couple of participants noted that they did not expect this sector to be a major contributor to economic growth over the remainder of the year

On capex:

Business fixed investment remained soft even as the drag from the sharp contraction in drilling rigs over the first half of this year appeared to be fading. Although investment spending was expected to pick up over the second half of this year, a few participants were concerned that the further decline in oil prices that had occurred in recent weeks might continue to hold down energy-related investment. In addition, government spending was ex-pected to add very little to growth in aggregate spending this year. Participants also expected net exports to con-tinue to subtract from GDP growth over the second half of the year, reflecting in part the damping influence of the dollar’s earlier appreciation

And on the general market:

On balance, broad U.S. equity price indexes were little changed over the intermeeting period. Option-implied volatility on the S&P 500 index over the next month in-creased for a time in response to foreign developments before falling back to the lower end of its range over re-cent years. Based on reports from about 40 percent of firms in the S&P 500 index, earnings per share in the second quarter were about unchanged or slightly higher than their first-quarter levels. Spreads on 10-year triple-B-rated and speculative-grade corporate bonds over comparable-maturity Treasury securities widened some-what over the period.

But the punchline which the market appears focused on:

The risks to the forecast for real GDP and inflation were seen as tilted to the downside

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In summary what rate hike? The countdown to QE4 has begun.

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Full Minutes below: