On Wednesday afternoon, the Federal Reserve released minutes from their July 28-29 Federal Open Market Committee meeting. Investors were looking forward to the minutes to discern if the Fed might start hiking rates this September, as previously expected. The minutes were somewhat muddled as they showed members continue to debate whether it is appropriate to start raising rates. But in the end, the minutes appeared to show a bias toward keeping rates low, largely due to inflation not being near the Fed’s target figure.
Conventional theory says the Fed, in trying to fulfill its dual mandate of stable prices and full employment, must try to interpret economic data to see which way the economy is tilting; is there slack in employment and therefore low rates are needed, or is inflation becoming a risk and therefore higher rates are needed? While this teeter-totter of prevailing conditions sounds good in theory, what we often find is the Fed is faced with contradictory data on economic conditions.
The recent release of July’s minutes is an example of this confusion. The Fed noted the labor markets have been improving with unemployment at 5.3%, the lowest rate so far since the recession. But historically, this isn’t that low; unemployment reached lows of 4.4% and 3.8% before the last two recessions in 2008 and the early 2000’s, respectively. Furthermore, the Fed itself admitted the labor force participation rate and the employment-to-population ratios both declined. Translation: the unemployment rate continues to decline, as less people look for work.
GDP remains tepid. Recall that growth estimates for GDP were well above 3% not too long ago, which is why many expected a rate hike as the Fed wouldn’t have as much trouble hiking rates going into a stronger economy. Meanwhile, the Fed continues to brush off the weak first half of the year as being ‘transitory.’
Inflation continues to sit below the Fed’s 2% target. The meeting minutes also labeled this as transitory, as the low inflation was attributed to lower energy prices and the decline in import prices due to past dollar appreciation.