Minutes Reveal a Split Federal Open Market Committee

The U.S. Federal Reserve meeting minutes, released at 1800 GMT, showed a split developing between FOMC members over the timing of the next interest rate hike. One camp is worried about the low-inflation environment while the other is worried about a jump in inflation if there is a delay.

The minutes cover the July meeting at which central bank policymakers voted to hold the target rate in the range of 1 percent to 1.25 percent. The minutes include a summary of FOMC member views that inflation ultimately will get to the Fed’s 2 percent target but is clearly not there yet.

The more dovish meeting participants expressed “concern about the recent decline in inflation” and said the Fed “could afford to be patient under current circumstances.”  The “argued against additional adjustments” until the central bank was sure that inflation was on track.

The more hawkish FOMC members “worried about risks arising from a labor market that had already reached full employment and was projected to tighten further.” They also argued that delaying a steady dose of rate hikes could cause the Fed to overshoot its employment target and cause financial instability.

FOMC members also agreed that the process of reducing the Fed’s massive balance sheet should begin “relatively soon,” with some members arguing for a more concrete date to be set. Analysts and traders largely expect the Fed to announce the plan to begin the trimming of the balance sheet at its September meeting. The process should then begin shortly thereafter.

In their assessment of the economy, the FOMC members were largely impressed, especially in the areas of employment and household spending. Members did express some concerns over June’s weak retail sales, which bounced back strong in July, and stagnant wage growth.

Fed officials were less optimistic about the federal government doing its part to stimulate the economy through fiscal policy. They are hoping President Trump and Congress get together on tax reform and increased infrastructure spending.

“Several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans,” the minutes stated.

“In addition, a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus program had declined further or that the fiscal stimulus likely would be smaller than they previously expected.”

The next Fed meeting is in September. At this time, the market is pricing in no chance of a rate hike. However, the chances are 50/50 that rates will be hiked in December.