What was hidden in the FOMC minutes

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While the markets didn’t react much to the minutes of the Federal Open Market Committee meeting from April 30-May 1, analysts have homed in on the phrase “some time” and the absence of discussion of a rate cut.

"We found the insertion that a patient approach would be appropriate for 'some time' to be interesting," according to a Morgan Stanley Research commentary. While some hawks on the panel still see a rate increase coming if the economy progresses as projected, the commentary suggests “some time” delays any increase “further out in 2020.”

“So there's less conviction on the Committee about whether a hike will be the next move,” Morgan Stanley said, “and for those who think there will be a hike there's less conviction on the timing.” And, as such, Morgan Stanley expects the dots in the upcoming Summary of Economic projections in June to dip again. “It only takes two dots moving down to no hikes in 2020 to move the whole SEP median down to no hikes for both this year and next.”

The minutes included discussion of a rate hike, “but (likely intentionally) failed to detail conditions for a rate cut,” Berenberg Capital Markets U.S. Economist Roiana Reid said in a note.

“We expect the Fed to leave the Fed funds rate unchanged through 2020, with the bar for a rate cut lower than the bar for a rate hike primarily because of persistently low realized inflation and inflation expectations,” she wrote.

Berenberg also expects lower inflation dots when the SEP is released next month. “It will be interesting to see if any member projects a lower Fed funds rate path as the appropriate monetary policy in response.”

The yield curve, which is flat to inflated, will also keep the Fed from lifting rates, so as “not to test history with any significant and extended inversion of the yield curve,” Reid writes.

Little was said about trade issues with China, since tensions increased after the meeting. “We believe that intense and protracted trade tensions would raise the probability of a rate cut,” according to Reid. “The Fed would likely characterize any boost to inflation from tariffs as temporary. The more significant impact from escalated trade tensions would be a dent to confidence that could have implications for hiring, consumption and investment. It would be difficult to see the Fed increasing its policy rate in this scenario, even if inflation were to exceed 2%.”

At his post-meeting press conference, Fed Chair Jerome Powell noted the balance sheet composition, and the minutes fleshed out the arguments. Shortening the maturity of the balance sheet could give the Fed more room to buy longer-term securities in the next slump, while some members felt shortening the portfolio structure “could result in a lower long-run neutral federal funds rate.”

Berenberg noted Federal Reserve Bank of Chicago President Charles Evans has made that case in recent remarks, “so he may be leading the charge on this argument.”

The extended discussion of inflation was meant, in part to "dispel any one-to-one linkage between the [personal consumption expenditure reading] running below a long-term acceptable target of 2% and a near-term cut in rates," said John Donaldson, vice president at Haverford Trust Company. With the market pricing in a 79% chance of a rate cut this year, "the FOMC had several discussions during the meeting which appear to aim to argue that the 79% forecast is well ahead of the fundamentals of the economy and certainly not solely dependent on the PCE."

By using the term "some time," which generally is seen as six months, he said, they basically ruled out a cut in rates this year.

"Secondly, they pointed out that concerns from several participants regarding downside risks to the economy had abated," Donaldson added. "Lastly, they used the word 'transitory' regarding the slowdown in inflation."

Economic data
The level of initial jobless claims dipped to 211,000 in the week ended May 18 from 212,000 the week before. Economists polled by IFR market expected an increase to 215,000. This suggests the labor market remains strong.

Continuing claims grew by 12,000 to 1.676 million in the May 11 week.

New home sales fell 6.9% in April to a 673,000 seasonally adjusted annual rate, the Commerce Department reported. The headline number for March was revised to 723,000 (initially reported as 692,000), its highest read since October 2007. The numbers for February and January were also revised up. Economists expected 679,000 sales in the month.

"The strong March sales pace was due to a combination of lower interest rates and the use of builder price incentives," said National Association of Home Builders Chief Economist Robert Dietz. "At the same time, the April sales report was a solid number coming off a very strong March reading."

Finally, the Federal Reserve Bank of Kansas City’s May Manufacturing Survey showed “Regional factory growth was sluggish again in May,” said the Bank’s Chad Wilkerson, vice president and economist. “Several firms noted that new tariffs were disrupting activity.”

The month-over-month composite index slid to 4 in May, from 5 in April.

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Monetary policy Economic indicators Jobless claims Federal Reserve FOMC