FOMC Minutes Preview: Debate Shifting From “How High” To “How Long”

This afternoon at 2pm ET, we will get the minutes from the July FOMC meeting.

As a reminder, this is what happened at the July meeting: 

• The Fed delivered the expected 25bp hike with a very plain statement that was similar to June’s; it acknowledged that the economy is growing at a “moderate” pace instead of a “modest” one, and emphasized that job gains are strong, and the unemployment rate is low.
• At his press conference, Powell did not give any further clues either and stressed that the Fed will be looking at the totality of data that is set to come and left all options open for the next meeting, a message that was interpreted dovishly by markets. He also said the effects of tightening are not fully felt yet and mentioned that inflation still has a way to go cool to 2%, but noted improvements in the labor market. However, he highlighted that consumer spending growth has slowed compared to earlier this year.
• In the Q&A, Powell did not give a clear signal about future rate decisions, again framing it around incoming data, adding that the Fed might raise rates in September if the data supports it. And while he suggested a slower pace of rate increases, lifting them at consecutive meetings was still possible. Powell mentioned that stronger economic growth could lead to higher inflation, requiring a policy response. He discussed the possibility of rate cuts in the future if inflation comes down convincingly. He wants to see inflation decrease sustainably, and wages may play a role in bringing it down.

With the Fed in a data-dependent policy-setting mode, the FOMC minutes from the July meeting are not expected to contain many surprises, however traders will be looking for any commentary on how the Fed assesses growth  dynamics; given that inflation is slowly inching back down towards target, many expect the Fed to pivot policy, and eventually begin cutting rates to support the economy.

Money market currently price in the terminal rate between 5.25-5.50%, though the Fed’s June projections have penclled in a further hike; markets are also expecting rate cuts to start in Q1 2024.

Mizuho expects the FOMC minutes to echo the “See you in September” message, even though we may see some doves argue for stopping rate hikes. In any case, it seems that the debate is now shifting – in the Fed’s Williams words “we’re pretty close to what a peak rate would be and the question will really be […] how long will we need to keep policy in a restrictive stance”.

Mizuho’s view is one of “longer than expected”; the Japanese bank sees the first Fed cut in Q3-24 and the latest upside surprise in US retail sales numbers gives us more conviction on our view. As a reminder, earlier this week Goldman published a note (available to pro subs) in which it called for the first rate cut in Q2 2024.