Fed Minutes Could Still Hold Important Clues Post-Brexit Vote
- Economists cite shift in FOMC tone even before U.K. vote
- Record could reveal crucial discussions on jobs, neutral rate
By Christopher Condon and Steve Matthews, July 6, 2016
(Bloomberg) — Minutes of the Federal Open Market Committee’s June meeting still matter, even if the U.K.’s surprise vote to leave the European Union swept away the prospects for a Fed interest-rate increase any time soon.
There’s a deeper debate within the central bank about longer-term prospects for the U.S. economy. Some economists are convinced that discussion took an important turn last month, and the FOMC minutes, due for release at 2 p.m. Wednesday in Washington, may shed light on what the committee was thinking.
“Something happened at this meeting,” said Thomas Costerg, senior U.S. economist at Standard Chartered Bank in New York. “Long-term picture worries are suddenly crystallizing now.”
At their June 14-15 session, several Fed officials lowered their expectations for the number of times they’ll increase rates this year, though the median projection held at two. They also lowered their estimate for the longer-run Fed funds rate — where they think it will eventually level off — to 3 percent, half a percentage point lower than in December. That means they believed the economy’s potential growth rate had dropped meaningfully, even before the so-called Brexit vote on June 23.
A dismal May U.S. jobs report may have shaken the Fed. The Labor Department reported employers added only 38,000 new positions in the month, after averaging almost 220,000 over the preceding 12 months.
Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said he’ll look for the FOMC’s reading on the weaker payrolls reports and what they mean for the outlook.
“It’s not an academic question,” he said. “The Fed’s debate on jobs could help markets trade Friday’s jobs report with a little more understanding of how Fed officials view the economy,” he added, referring to the June report due at the end of this week. Economists surveyed by Bloomberg estimate that employers added 180,000 new jobs last month.
Others see the Fed’s shift as independent of the labor market news. Chair Janet Yellen emphasized, in an otherwise dovish press conference following the June meeting, that “we should never pay too much” attention to “one job market report.”
“It was not that payroll number,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities LLC in New York. “It might have been an acceptance that monetary policy is increasingly global.”
Fed Governor Lael Brainard has argued since October that U.S. policy makers should take global conditions more into consideration when forming their outlooks for the U.S. economy. Her view appears to be supported by events since then, as financial markets transformed concerns focused outside the U.S. into conditions that helped postpone Fed rate hikes.
“If they are moving to this new paradigm, we could get a better view on how they see the world,” Goldberg said.
Costerg said he’ll look for discussion of the so-called neutral rate of interest — the level at which the Fed’s policy rate would be neither stimulative nor constrictive to the U.S. economy. Fed officials, and several outside economists, have said the rate may be lower than they had previously understood.
If true, that would mean current policy isn’t providing as much support to the economy as had been assumed. That could help explain why growth — 2.1 percent in the year through the first quarter — is so sluggish, but would also suggest that expectations for future growth will have to fall further.
“A realization that the neutral rate is low and close to zero may thwart their plans plans to continue hiking,” Costerg said.
Both Costerg and Goldberg said the committee may have received a briefing on neutral rate estimates from Fed staff economists at the June meeting. If so, details will show up in the minutes.
A discussion of the neutral rate may also overlap with any revelation in the minutes of what committee members said during their discussion of the sudden change in position by St. Louis Fed President James Bullard.
Bullard submitted projections that called for one rate hike this year and none more until at least 2019. Two days after the meeting he released a statement detailing how he now believes the U.S. economy is stuck in a rut and, essentially, at its medium-term level of potential growth. Bullard had until recently been considered one of the more hawkish members of the committee, favoring more rate hikes than most colleagues.
“Bullard’s swing may embody the wider shift,” on the FOMC, Costerg said.