Ecoinometrics - Mapping the Fed’s actions until the end of the year

FOMC minutes report, June meeting

The FOMC has released the minutes for the June meeting. As we always do, we are going to:

• Analyze what they said.

• See how well it matches the economic data.

• Read the tea leaves in Jay Powell’s cup to predict the future.

Let’s begin.

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FOMC minutes report, June meeting

The takeaway

You know what keyword makes half of the major topics in the FOMC minutes for the June meeting?

Inflation!

That’s a shocker I know… but jokes aside the Fed is not worried about a recession, they are not worried about the banking sector, they are even less worried about the job market.

Which tells you all you need to know about how the rest of the year is going to play out. One 25bps rate hike this summer and the odds for another 25bps rate hike before Christmas are 1:2. Everyone is betting on that at this point.

The real question is not so much what the Fed is planning but what the US economy is going to do. The real GDP and the job openings data are starting to show the first signs of rolling over. And that is lining up pretty well with the idea of a recession or at least a slowdown of the economy for the end of the year.

But so far I don’t see any reason to change our assessment of what will happen over the next six months:

• Rates will stay high.

• Second order effects of the relatively tighter financial conditions will play out in the economy. 

• The downside risk for the financial markets will be at its highest at the end of the year, beginning of the next. 

Until that has run its course I would keep some dry powder and make sure to not be exposed to fat tail events.