Key Quotes and Our Thoughts from Fed Minutes
By Tim Pierotti
Below are the key quotes from the Fed Minutes which are essentially the notes of the last Federal Open Market Committee meeting, which took place on July 29th and 30th. We find the commentary hard to square with the market expectation of a cut in September. They may well cut, but it doesn’t sound like they think it’s a great idea.
“Regarding inflation persistence, a few participants emphasized that they expected higher tariffs to lead only to a one-time increase in the price level that would be realized over a reasonably contained period. A few participants remarked that tariff-related factors, including supply chain disruptions, could lead to stubbornly elevated inflation and that it may be difficult to disentangle tariff-related price increases from changes in underlying trend inflation.”
In other words, there is no agreement on whether the tariff driven inflation will be transitory or persistent. In fairness to the Committee, what is happening now with tariffs is unprecedented in the modern economy and nobody should have any confidence predicting how this plays out.
”Participants generally pointed to risks to both sides of the Committee's dual mandate, emphasizing upside risk to inflation and downside risk to employment. A majority of participants judged the upside risk to inflation as the greater of these two risks, while several participants viewed the two risks as roughly balanced, and a couple of participants considered downside risk to employment the more salient risk.”
In other words, unless the employment data inflects lower and the inflation data flattens, I don’t see how the Fed could justify a September cut.
“Regarding upside risks to inflation, participants pointed to the uncertain effects of tariffs and the possibility of inflation expectations becoming unanchored.”
In other words, there are members who think that if the Fed isn’t vigilant about fighting tariff driven inflation, they risk losing credibility and the long end of the bond market will get smoked. That is the disaster scenario for the Fed.
“Participants assessed that the effects of higher tariffs had become more apparent in the prices of some goods but that their overall effects on economic activity and inflation remained to be seen. They also noted that it would take time to have more clarity on the magnitude and persistence of higher tariffs' effects on inflation.”
In other words, they do seem to have the humility to know that they have no idea how tariff driven inflation and its drag on consumer demand will play out.
“Participants noted that the Committee might face difficult tradeoffs if elevated inflation proved to be more persistent while the outlook for the labor market weakened. Participants agreed that, if that situation were to occur, they would consider each variable's distance from the Committee's goal and the potentially different time horizons over which those respective gaps would be anticipated to close. Participants noted that, in this context, it was especially important to ensure that longer-term inflation expectations remained well anchored.”
In other words, they are already facing the reality of inflation well above the mandate and rising, while the labor market is at risk of inflecting weaker. But, the fact is they are far further away from their inflation goal that their employment goal so why are they cutting? We’ll see. It will all depend on the data between now and a month from now, but in our view expectations of a cut are not consistent with the Fed’s view of things three weeks ago.
Tim Pierotti is WealthVest’s Chief Investment Strategist.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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