Fed Notes Indicate Aggressive Monetary Policy May Be Needed Longer

The market reaction to today’s release of notes from the Fed’s July meeting was “on one hand, but on the other hand”.    The policymakers noted that the rapid rebound in employment in May and June may not last as COVID spikes continue to affect the economic activity in July and August.  They noted future path of the recovery is highly dependent on the path of the virus, the timing of treatments and vaccines.  Future labor market growth is dependent on “broad and sustained” re-openings of businesses and normalized consumer behavior.  Therefore, the Fed indicated that aggressive stimulus may be needed longer than previously assumed.  Usually the market reacts positively to this type of news. Any indications from central banks that the “punch bowl is being removed” often results in a sell off in equity markets.  Today the initial reaction indicated a nervous market digesting the Fed’s downbeat look at the economic picture.  Last week’s spike in CPI had not yet occurred at the time of the meeting but it seems that the Fed continues to believe that inflation is not an issue. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners