Central Bank Minutes Show Continued Focus on Inflation

Market participants were able to gain some insight into the discussions at two recent central bank meetings as the Federal Reserve (Fed) and European Central Bank (ECB) released the minutes of their respective July meetings over the past two days. Inflation was a hot topic at both meetings.

The minutes of the Fed’s meeting showed a lively discussion on why inflation continues to trend below the Fed’s 2% target and what that means for the future path of rate hikes. More hawkish Fed members believed that waiting to raise rates could lead to an overshoot of inflation in the future, whereas a more dovish contingent felt that the Fed can wait until inflation starts to move higher. Although news stories have latched on to this division, this kind of discussion has been ongoing and will likely continue. Markets interpreted the discussion as slightly dovish on balance as fed funds futures show the odds of a December rate hike have fallen from 43% the day before the meeting to 38% currently.

Markets were also hoping for insight on when the Fed might begin its balance sheet normalization process. Though “several participants were prepared to announce a starting date for the program at the current (July) meeting,” we now know that didn’t happen, and consensus opinion continues to point toward a September announcement.

Last, the Fed continued to discuss the impact of easing financial conditions on asset valuations, stating that “vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets.” However, the potential risks to financial stability were deemed moderate on balance.

Markets interpreted this morning’s ECB meeting minutes as dovish as well. Persistently below-target inflation has been an issue in Europe for some time, and markets keyed in on language stating that concerns “were expressed about the risk of the exchange rate overshooting in the future,” which would exert further downward pressure on inflation if the euro continues to appreciate. This may limit the potential for the ECB to taper its quantitative easing purchases, as such a move would likely put more upward pressure on the euro.

The next official monetary policy meetings for the major central banks (Bank of Japan, ECB, and the Fed) take place in September, though central bank watchers will also be monitoring the Kansas City Fed’s annual Jackson Hole Symposium, which will be held August 24-26, 2017.



The economic forecasts set forth in the presentation may not develop as predicted.

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The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal  regional Federal Reserve Banks rotate their service in one-year terms.

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Market implied rate hike expectations are calculated based on the pricing of various fed funds futures contracts.

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