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Fed Minutes Avoid Forward Guidance

Yesterday’s release of Fed minutes from the July 27th policy meeting reiterated the central bank’s determination to “promote price stability.” Markets were looking for clues regarding the path of the Fed Funds rate over the course of the next few meetings. Whereas the Fed embraced “forward guidance” during the beginning of Fed Chair Powell’s term (circa 2018-2020). Yesterday’s Fed is increasingly data-dependent. The minutes indicate that Fed officials feel that hiking the fed funds rate last month to 2.25% – 2.50% puts the rate at the “neutral” level (neither accommodative nor restrictive). Many participants feel that a “restrictive” level will be appropriate which means more hikes to come (Hawkish).

Also in the minutes: “as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation” (Dovish). The futures market is now predicting a 66% chance of a 50 basis point hike at the September meeting. There is no meeting this month. The Fed also is concerned about its public image: “a significant risk…is that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently.” This speaks to consumer and employee behavior and expectations being a critical component of wage and price stability. Interestingly, yesterday’s derivatives markets predict that inflation will be approximately 3.3% over the next 12 months. Interestingly, the market prediction last August was also 3.3%. How did that turn out? The 10 Year Treasury has traded in a tight range this week between 2.77% and 2.90%, settling yesterday at 2.87%. Stay tuned…

By David R. Pascale, Jr. , Senior Vice President at George Smith Partners